TARP Inspector General: Same Road, Faster Car

In an unusually harsh report released yesterday, the government’s Special Inspector General for TARP blasted the bailout program, charging that it has not only failed to meet its goals, but that — absent change — it may have made things worse.

Among other things, Inspector General Neil Barofsky concluded that because of the bailouts, the market is “more convinced than ever that the Government will step in as necessary to save significantly significant institutions.” This, he says, creates a moral hazard, through what he calls a “heads I win; tails, the Government bails me out,” mentality. The recent extension of TARP for another year only reinforced that moral hazard, by “permitting Treasury to maintain a war chest of potential rescue funding…”

The IG also expressed concern about the housing market, stating that the “Federal Government’s concerted efforts to support home prices,” in part funded by TARP, “risks re-inflating” the housing bubble.

In other words, the report concludes: “…even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform [which the report does not define], we are still driving on the same winding mountain road, but this time in a faster car.”

The answer, however, isn’t more regulation and protection of “too big to fail” institutions, as proposed by President Obama. Instead, policymakers should make failure a more feasible option for all institutions, reducing pressure for bailouts and forcing them to bear the cost of their own actions. In doing that, a good place to start would be a revised bankruptcy procedure.

Mountain roads are always dangerous. But by taking dangerous cars off the road, rather than paying for their repair bills, the highway can be made safer for everyone.