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Thursday
Apr022009

A big hole in the TARP

Paul Krugman identifies here something that's been bothering me about TARP. Its not-quite-admitted purpose is to prop up the prices of whole asset classes in order to save some financial institutions that are insolvent or nearly so. Because the benefits of that action get dispersed and captured by many other financial institutions and investors that are not in particular trouble, the program is a very inefficient way to fix the insolvency problems of a few.

Furthermore, why is the government in the business of propping up asset prices anyway? When asset prices were inflating obvious bubbles—remember Alan Greenspan spoke of "irrational exuberance" in connection with the dot-com bubble—the government decided it should not second-guess markets. Is the new policy to second-guess markets only on the downside, or will it henceforth act to moderate irrational exuberance also?

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