How does TARP affect the economy?

By Jean Folger AAA
A:

TARP - or the Troubled Asset Relief Program - is a government program created in response to the subprime mortgage crisis that began in 2007. The original goal of the program was to give the U.S. Treasury $700 billion in purchasing authority to buy mortgage backed securities (MBS), the troubled assets that were to blame for the credit crisis, and to create liquidity in the money markets. In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act reduced the total TARP purchasing power to a maximum of $475 billion. In October 2010, TARP's authority to incur new obligations ended.

The economic impacts of TARP have been evaluated in terms of its effect on factors such as employment, growth and stability. Ask two different economists or analysts how TARP has affected the economy and you will likely get two different answers. Former FDIC chairman Bill Isaac, for example, opined in his 2010 book Senseless Panic: How Washington Failed America that "any objective analysis would conclude that the TARP legislation did nothing to stabilize the financial system that could not have been done without it. Moreover, the negative aspects of the TARP legislation far outweighed any possible benefit."

U.S. Department of the Treasury Acting Assistant Secretary, Timothy G. Massad, on the other hand, concluded in a March 4, 2011, testimony to the U.S. Congress that TARP was a success. In his testimony, Massad stated, "… we can safely say that this program has been remarkably effective by any objective measure" and, "We have helped bring stability to the financial system and the economy at a fraction of the expected costs." Massad added that TARP was integral to the economic recovery and that, because of TARP, banks are better capitalized and the public is less afraid that major financial institutions will fail.

In short, because TARP spurs much controversy and debate, the answer to "How does TARP affect the economy?" will differ depending on whom you ask and what criteria are used to quantify its effects.

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