TARP and the 2008 Financial Crisis: Successes and Failures
This paper examines the Troubled Asset Relief Program (TARP), enacted in fall 2008 in response to the U.S. financial crisis. It traces the origins of the crisis — including Federal Reserve monetary policy, subprime mortgage lending, and the collapse of mortgage-backed securities — before evaluating TARP against its five stated objectives: stabilizing the broader economy, stabilizing the banking system, stimulating lending, creating a secondary market for troubled assets, and minimizing waste. The paper finds that TARP achieved partial success at the macroeconomic level but fell short in most other areas, citing lack of oversight, continued bank failures, minimal lending stimulation, and an illiquid secondary market for collateralized debt obligations as key shortcomings.
- Introduction: Overview of TARP and its five objectives
- The Financial Crisis: Origins of the 2008 housing and banking collapse
- Too Big to Fail: Government rationale for intervening in major bank failures
- Troubled Asset Relief: TARP's key clauses and mechanisms explained
- Analysis of TARP: Evaluating TARP against each stated objective
- Conclusion: Mixed verdict on TARP's long-term effectiveness
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What makes this paper effective
- The paper establishes clear, measurable criteria for success before evaluating TARP, giving the analysis a structured and objective foundation.
- It balances macroeconomic context (the origins of the crisis) with policy specifics (TARP's individual clauses), making the argument accessible without sacrificing rigor.
- The conclusion avoids false binaries, acknowledging partial successes while identifying concrete failures — a nuanced stance supported by evidence throughout.
Key academic technique demonstrated
The paper demonstrates criterion-based policy evaluation: the author explicitly defines five measurable objectives drawn from TARP's stated goals, then assesses each independently using economic data, regulatory outcomes, and sourced reporting. This technique is useful in public policy and economics papers because it prevents vague, impressionistic judgments and forces the writer to engage with evidence at each dimension of the policy's intent.
Structure breakdown
The paper opens with a brief framing introduction, then builds necessary background in two sections — one on the crisis itself and one on the "too big to fail" doctrine. A third background section explains TARP's specific mechanisms. The analytical core then evaluates TARP objective by objective. The conclusion synthesizes the findings, acknowledging uncertainty about long-term outcomes. This background-then-analysis structure is well-suited to policy papers where readers need contextual grounding before evaluation can be meaningful.
Introduction
In the fall of 2008, the financial crisis hit its critical mass. The crisis had been brewing for a couple of years, as the collapse of the housing bubble began to reveal a banking industry that was far too heavily invested in risky mortgages and mortgage-backed securities. First, Bear Stearns was acquired by JP Morgan. Then, in September, two catastrophic banking failures occurred: Lehman Brothers went under, and the FDIC orchestrated the sale of Washington Mutual to JP Morgan (Dash & Sorkin, 2008). Banks, wary of having too many bad assets on their books, began to constrict credit. Fearful of both the economic impacts of a credit crunch and the panic that would ensue among both the public and investors if more major bank failures occurred, the federal government initiated what would become known as the Troubled Asset Relief Program (TARP).
This paper examines TARP and its role in alleviating the financial crisis. Special attention is paid to the ways in which TARP achieved its goals and the ways in which it failed to do so. TARP was controversial from the outset, with opposition and support coming from both economic conservatives and liberals alike. The program has five main objectives, but can genuinely claim success in only one area thus far. TARP may not end up a failure, but successes are few as of yet.
The Financial Crisis
It is widely argued, with considerable merit, that the Federal Reserve precipitated the financial crisis in the early part of the decade by holding interest rates at unusually and unsustainably low levels. "The Federal Reserve's expansionary monetary policy supplied the means for unsustainable housing prices and unsustainable mortgage financing" (White, 2009). Investors wary of technology stocks were flush with money and seeking a haven, and so they turned to real estate. The monetary expansion also left banks with surplus capital to lend, encouraging them to take on an increasing amount of risk in the form of subprime mortgages. A portion of this risk was then portioned off and sold in the form of allegedly high-grade mortgage-backed securities. When the Fed initiated a rapid increase in rates to slow the monetary expansion in the middle part of the decade, the housing market collapsed. Many of the subprime mortgages had been made at low introductory rates, with higher rates kicking in after a few years. Borrowers were unable to make their new payments at the higher rate, and with housing prices stagnant or declining were also unable to liquidate.
Banks sitting on stockpiles of foreclosures found themselves unable to meet their liabilities or their reserve requirements and began to restrict their lending as a result. As some banks began to collapse under the weight of their bad assets and others curtailed lending, the economy began to slow and then finally contract.
The problems, therefore, were manifold. The Fed contributed with its monetary expansion. Banks contributed by lowering their lending standards in an attempt to use their excess lending capacity. Consumers contributed by taking on mortgages they could not afford. Investors contributed by adopting a "herd mentality" with respect to the risky bundled securities of subprime mortgages (Tetangco, 2009).
The federal government and the regulators responsible for the banking industry took immediate steps to address the issue. The FDIC began aggressively managing the financial services industry — not just with the takeover of Washington Mutual but eventually with over one hundred other financial institutions as well (Glass, 2009). For its part, the federal government began to take steps to alleviate the distress on the banking industry.
Works Cited
Dash, E. & Sorkin, A. (2008). Government seizes WaMu and sells some assets. New York Times. Retrieved November 3, 2009 from http://www.nytimes.com/2008/09/26/business/26wamu.html
Smith, A. & Yandle, B. (2009). Too big to fail, read, count or stop. Cato Institute. Retrieved November 3, 2009 from http://www.cato.org/pubs/regulation/regv32n2/v32n2-11.pdf
McIntire, M. (2009). Bailout is a windfall to banks, if not to borrowers. New York Times. Retrieved November 3, 2009 from http://www.nytimes.com/2009/01/18/business/18bank.html
White, L. (2009). Federal Reserve policy and the housing bubble. Cato Journal. Retrieved November 3, 2009 from
Bebchuk, L. (2009). Buying troubled assets. Harvard Law School. Retrieved November 3, 2009 from
Liberto, J. (2009). Bailout cop busy on the beat. CNN. Retrieved November 3, 2009 from http://money.cnn.com/2009/04/21/news/economy/tarp_cop_barofsky/
Tetangco, A. (2009). Keynote paper: Antecedents of the global financial crisis: A multi-factorial phenomenon. Asia-Pacific Social Science Review. Retrieved November 3, 2009 from http://www.bis.org/review/r090210c.pdf
Glass, K. (2009). 100th bank failure in 2009 announced; tally reaches 103. Fox Business. Retrieved November 3, 2009.
Paletta, D. (2009). Raft of deals for failed banks puts U.S. on hook for billions. Wall Street Journal. Retrieved November 3, 2009 from http://online.wsj.com/article/SB125166830374670517.html
Lam, E. (2009). U.S. reports Q3 GDP growth: Economists rejoice, sort of. Financial Post. Retrieved November 3, 2009.
Grey, B. (2009). Wall Street lauds FDIC plan to replenish bank deposit insurance fund. World Socialist Website. Retrieved November 2009.
Mahoney, C. (2009). A fraction of TARP money is needed to enhance stability. Financial Times. Retrieved November 3, 2009.
No author. (2009). Troubled Asset Relief Program (TARP) information. Federal Reserve. Retrieved November 3, 2009 from http://www.federalreserve.gov/bankinforeg/tarpinfo.htm
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