TARP Round 2

Should congress release the second half of the TARP funds? I'm torn.

On the one hand, it's no secret that the TARP has been horribly mismanaged. You've got banks taking money that admit they don't need it. You've got banks using the money to pick up other banks cheaply. Perhaps my personal favorite is the insurance company that bought a bank just so they could qualify for a bailout. My understanding is that all this money is supposed to be used to ease the "credit crunch"; to open up the credit markets allowing businesses and consumers to finance capital needs again. Of course, that's not happening either.

On the other hand, it's not like the bailout has done nothing. The stock market has stopped its free-fall and the much-feared utter catastrophe has been avoided. Jim Manzi more thoroughly lays out what the bailout has done for us, but he also ends with a warning about round 2:

Congress has the right to approve or deny any request that Treasury might make for the second tranche of the additional $350 billion. This should be treated as a separate request. We have the luxury of time, as compared to a few months ago, to vet this request with far greater rigor, and in light of what we have learned. Specifically, before authorizing this money, Congress should perform its oversight function, and demand to know: (1) what underlying risks, not to shareholders or employees, but of systemic financial collapse now exist or are latent that would justify this much money, and (2) how we will avoid the zombie bank problem, including potential application of lending requirements in return for capital, as has been done in the UK.

I supported the original bank bailout, and continue to believe that it was a painful, but correct, decision. However, supporting the next tranche will require a lot of convincing.

It seems to me that we're stuck in a battle between those oft-opposing two methods of decision-making, Cost-Benefit Analysis and the Precautionary Principle.

PP seems to speak clearly in favor the the second round of bailout money. Yes, no doubt much of the money will be used in inefficient and morally troubling ways. But the danger of a global economic collapse far too serious to worry about that. Staving off economic disaster is Job One, and some rich people game the system along the way, that's the price you pay.

CBA is more difficult. Are we getting a good bang-for-the-buck? What is the real risk of collapse, and are we spending too much to mitigate it because the odds are small? What are the real costs of the negative aspects of the bailout and do they outweigh the gains under some time horizons? I'm not going to dare claim I can figure that out; it will require the brains of actual economists and finance experts.

I wish I had some great conclusion to be drawn from all this, but I still don't. I don't know enough about the risks involved to even attempt to resolve this, but I thought I could lay out a little of what's gone through my head this week thinking about it. I'd love to hear others' thoughts in the comments or in followup posts.