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Why is TALF 2 Less Controversial?

Americans get less upset now about big government bailouts of financial institutions than they used to. During the Great Recession the bailouts of “banks” (which functioned as a catch-all term at the time to describe banks, hedge-funds, insurance companies and other financial firms) was a big deal. However, nowadays nobody really seems to mind. To prove this point I am going to go over the history of one of the most unpopular Federal Reserve programs ever and how it was exactly replicated without anyone noticing. This program originally proposed by Obama Treasury Secretary Timothy Geithner, called TALF and administered by the FED, was hated. But later in 2020, when the FED made TALF II, nobody seemed to care.

  1. The Geithner Plan

Timothy Geithner was Barack Obama’s first Treasury Secretary. He and President Obama (who was not an economist) were responsible for dealing with the on-going Recession from the moment they got their jobs. He was given a slush-fund of money at his disposal as Treasury Secretary thanks to a bailout-law passed by Congress under President Bush called TARP (“Troubled Asset Relief Program”). He promulgated a series of ideas to respond to the crisis loosely referred to as a Geithner Plan.

One idea in his plan was the “Public-Private Investment Program.” The idea of this plan was to take “toxic” financial assets out of the hands of troubled financial institutions and replace such toxic assets with cash they could use to pay off their debts. Many progressive economists were actually hoping that TARP money would be used to bailout people in debt so that they could pay their debts to ensure that the debt-backed securities were less toxic. What Geithner planned instead is that private sector financial institutions would pool money together with the TARP money from the Treasury and get loans from another government agency (either the FED or FDIC (technically an FDIC insured loan issued by another private third party)) in order to buy a toxic asset from another financial institution. The way the loans would work is that if anything went wrong with the toxic asset the Treasury and private bank bought, the private bank could refuse to pay back the loan. Because of the way the loans would be structured, the only thing the government could do is take ownership of the toxic asset (and not get its money back). However, if the toxic asset recovered in value the private bank could sell it, pay off the loan and split the profits with the treasury 50/50.

It was a very confusing program because there would be at least 4 participants in any exchange and the government would be 2 of them. However, this confusion was likely intentional. In effect, this was another use of TARP money that would not really help the economy. Instead, it would help the rich. The government would be writing people insurance policies and giving low interest rate loans in return for buying particular assets that nobody wanted to own. This would be a wealth transfer to the owners of those toxic assets and the investor who was being paid with insurance to buy them.

The program also served the purpose of economizing the TARP fund. 1 dollar of TARP money spent on a toxic asset would be matched 1:1 with money from a private investor and much more than 1:1 from other government agencies. This was important because over time the TARP funding would be used up.

  1. TALF

Geithner announced the Public-Private Investment Program early in 2009. However, it didn’t really get off the ground in its original form. Instead, the FED created its own version named “TALF” (Temporary ABS (Asset-Backed Securities; I’ll explain them in the next paragraph) Loan Facility). This was like the Geithner Plan idea except the Treasury and Tarp money was no longer a part of it. Without any help or permission from politicians, the FED would extend the same kind of loans which paid investors to buy toxic assets with insurance.

Asset-Backed Securities (“ABS”) are created through the process of “securitization.” This is where an Investment Bank buys up assets, creating a pool of wealth and selling off interchangeable and standardized claims on that wealth. The interchangeable nature of securitized wealth allows for the formation of a market (like how there is a market for Apple stock or a particular series of government bonds). The market-forming nature of claims on the pool of wealth makes the claims “securities.” Those securities are Asset-Backed because they are backed by underlying assets.

In this case, one could clarify the FED program as Debt-Backed Security lending program. This was because basically all the wealth that the FED was insuring was a securitized claim on debt.

The FED does not agree with my characterization of their program. According to their website, the purpose of TALF was not to bail anybody out, but to “to enhance demand for ABS and thereby spur new issuance of ABS in order to increase the flow of credit to households and businesses.” However, downloadable data on their lending facility clearly shows they were lending out a lot of money to support the purchase of securities which were backed by “subprime” credit card debt. And, even if they are to be taken at their word, then they were trying to use the program to, among other things, get more Americans in “subprime” (aka predatory) credit card debt.

This probably isn’t true.

The flow of credit language serves to obscure the effective bailout this program orchestrated. It’s doubtful the flow of credit really was the primary concern. Instead, it was to help financial institutions through a rough patch where the markets were starting to doubt that a large enough share of borrowers would be good for the money. Afterall the originator of TALF, Secretary Geithner, introduced this idea alongside many other bank bailout plans. He once said to a critical Elizabeth Warren, concerning the “HAMP” (Home Affordable Modification Program) plan, "We estimate that they [the banks] can handle 10 million foreclosures, over time. This program will foam the runway for them." In other words, Geithner could have used TARP money to lower the foreclosure rate more than he did. But past a certain point he chose not to. This was because he thought the banks could take the hit of only evicting a reasonably small number of men, women and children (if they could do it gradually enough). Does that seem like a level-headed guy who tries to increase liquidity and support employment, or a crook who wants to give his friends more money?

TALF was considered an outrage at the time. Bernie Sanders and Ron Paul teamed up to pass a law requiring the FED to release the records on who was getting a loan for what. Matt Taibi, a Rolling Stone reporter wrote an article asking why it was the government gave $220 million in loans to the wives of two Morgan Stanley executives so they could buy and profit off of other people’s accrued debt.

TALF and other Federal Reserve programs (many of which were unjustly criticized) were particularly noxious to people at the time because they were ostensible bailouts which no elected official approved. Elected officials were not consulted. In fact, Congress had to pass a law just to know what precisely the FED was doing.

  1. TALF II

In response to the economic fallout of coronavirus, the FED announced a new program called TALF II (sometimes TALF for short). It is almost identical to the original TALF. For instance, the “haircut schedule” (how much the individual lender needs to put their own money into buying the toxic asset as a function of what type of asset it is) is the same as the last one. Once again, the FED did not need congressional approval to start this program. Once again, nobody will know exactly who’s getting loans unless congress passes a law (this time around they probably won’t). The most significant difference is that in % of GDP terms, the program is larger this time. The chart below shows the size of both TARPs in % of GDP terms.

I think this is the best direct comparison imaginable to show that people are less upset about bailouts than they used to be. However, that led me to ask why people are less upset about bailouts.

Coronavirus might play a factor. Perhaps with all that’s happening, nobody has time to focus on the bailouts. They could be too distant and not seemingly important to the lives of ordinary Americans. Nonetheless, the American people still have time to think about foreign policy (Biden’s approval rating took its biggest dip when he ended a war). Furthermore, people still have time to get upset about purely contrived controversies which surround things like Kamala Harris’ Vogue cover picture and Dr. Seuss. Clearly our failure to get upset at the recent bailouts is not attributable to increased attention on more grounded or more serious problems facing Americans.

If we were rational, we’d probably be more upset about bailouts in the face of Covid-19 than in the face of the Great Recession. Back then, the economy would take forever to recover in terms of unemployment and the inflation rate would stay incredibly low. This represents a failure to stimulate the economy. However, high inflation and low unemployment today indicate that this failure did not really occur this time around. Furthermore, more recent experience shows that some stimulus at least can be achieved by giving money to ordinary people and letting the wealth trickle up (for example: the Child Tax Credit reform and the Economic Impact Payments). Hence, today we have more of a reasonable justification to say that one can provide an adequate level of support to an economy without bailing out large economic institutions. This is because we have seen a credible alternative and we live in a world where one can feasibly argue there is too much economic stimulus, so it would have made sense to cut the stimulus that went only to rich people.

However, as a society, we are far from rational. Instead, my guess is that the ability to stimulate our way out of any demand-side recession during Covid is what stopped people from being angry about bailouts. If we had today the sorts of economic problems that we had during 2009-2014 then eat-the-rich populism would be a palpable social trend.

Furthermore, the fact that poor and middle-class people got government handouts as well likely made it harder to get angry at bailouts-for the rich. This is true in part because the economy needs to be stimulated enough to get out of a prolonged recession, and handouts for ordinary people help with this. But also, people have an innate sense of fairness. During the Great Recession the bailouts were obviously unfair because everyone was struggling but only a small minority of people got any significant noticeable help. In contrast, during the lockdown it was clear the government was handing out at least some money for everyone.

The real lesson should be that governments can do a lot wrong but won’t face a populist backlash as long as they do the bare minimum for ordinary people. In 2009 Tim Geithner chose not to do this. Instead, he decided he wanted to be a bad person for the rest of his life. After serving as Obama’s Treasury Secretary, he became the head of a firm that sends checks to the homes of poor people in order to entrap them into debt.

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