TARP Bank Bailouts vs. Homeowner Relief: A Fair Comparison
This paper examines the unequal treatment of banks and individual mortgage-holders during the 2008 financial crisis, focusing on the Troubled Asset Relief Program (TARP) and a proposed Federal Reserve Bank of Boston homeowner assistance plan. The paper argues that while banks deemed "too big to fail" received sweeping government support without meaningful moral accountability, distressed homeowners faced strict eligibility requirements rooted in judgments of moral worthiness. Key comparisons address toxic asset acquisition, ongoing government assistance after recovery, access to future credit, and regulatory consequences. The paper concludes that TARP failed to impose consequences on the institutions most responsible for the crisis, while ordinary homeowners bore disproportionate moral and financial scrutiny.
- Introduction: The 2008 Financial Crisis and the TARP: Crisis context and TARP overview introduced
- TARP and the Moral Hazard of Bank Bailouts: Banks shielded from moral hazard consequences
- The Federal Reserve Bank of Boston Homeowner Relief Plan: Boston Fed plan details and eligibility criteria
- Eligibility Requirements and the Moral Calculus for Homeowners: Moral worthiness standards applied to homeowners
- Continuing Government Support: Banks vs. Homeowners: Banks received ongoing aid homeowners did not
- Racial Disparities and Flaws in the Moral Framework: Subprime lending discrimination complicates moral judgments
- Conclusion: Too Big to Fail, Too Powerful to Punish: Banks escaped accountability homeowners never did
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What makes this paper effective
- The paper sustains a clear comparative argument throughout, systematically contrasting how TARP treated banks versus how the Boston Fed plan treated homeowners across multiple specific dimensions: toxic asset acquisition, ongoing assistance, loan access, and moral accountability.
- It draws directly on primary policy documents (Foote et al. 2009) and a range of secondary sources — economists, journalists, and oversight panels — giving the argument empirical grounding rather than relying on opinion alone.
- The paper complicates its own framework by acknowledging that the moral distinction between "worthy" and "unworthy" homeowners is itself problematic, referencing the ACLU discrimination suit and the financial literacy gap among subprime borrowers.
Key academic technique demonstrated
The paper uses comparative policy analysis: it places two distinct government programs side by side and evaluates them against a consistent normative standard — moral hazard — to reveal structural inequity. This technique is strengthened by the author's use of direct quotations from policy briefs, economic commentary, and congressional oversight reports to substantiate each point of comparison rather than asserting differences without evidence.
Structure breakdown
The paper opens with an introduction that frames the crisis and previews its central claims. It then explains TARP and the moral hazard critique, followed by a detailed account of the Boston Fed homeowner plan. Subsequent sections compare eligibility standards, post-recovery assistance, and the racial dimensions of the subprime market. The conclusion ties the threads together, arguing that "too big to fail" effectively meant freedom from moral consequence — a standard never extended to individual homeowners.
Introduction: The 2008 Financial Crisis and the TARP
In 2008, the United States teetered on the brink of an economic crisis. Had the country suffered a full financial meltdown, the global economy could have spiraled downward in a manner unprecedented since the Great Depression. The crisis had begun in the U.S. subprime mortgage market but rapidly spread to other sectors of the economy. The remedy devised by the U.S. government was the creation of TARP — the Troubled Asset Relief Program — which gave the U.S. Treasury purchasing power of $700 billion to buy up mortgage-backed securities (MBS) from institutions across the country, in an attempt to create liquidity and unfreeze the money markets ("Troubled Asset Relief," Investopedia, 2012).
Almost every major banking institution, deemed "too big to fail" in the now-infamous phrase, received some form of relief. However, homeowners who were behind on their mortgages were angry that they received relatively little government support, even though they perceived themselves as far less culpable than the banks. Even the plan proposed by Jeffrey Fuhrer and his colleagues (Foote et al. 2009) on the Federal Reserve Bank of Boston website applied greater moral scrutiny to certain homeowners than to those affected by the crisis on the banking side — a distinction never made for the banks themselves. The TARP did not subject banks to the consequences of their moral hazard; the proposed Boston plan created a contrast between worthy and unworthy homeowners that the TARP never applied to financial institutions. Banks received additional, continuing assistance even after they recovered; the government did not acquire homeowners' toxic assets under the Fuhrer plan while it did acquire the banks' toxic assets; and banks were not subjected to the same market regulations that ordinary borrowers faced.
TARP and the Moral Hazard of Bank Bailouts
By some estimates, TARP was a resounding success. The U.S. economy, despite its slow job growth in the aftermath, was no longer in the peril it faced before the program's implementation. Credit became accessible for homeowners and others seeking loans, and the day-to-day transactions of microcredit lending that fuel the economy were once again functional. Not everyone, however, was pleased with the outcome for the banks.
Critics argued that the concept of moral hazard — the principle that one must reap what one sows — was fatally undermined by government bailouts that shielded banks from the consequences of their risky behavior. This argument holds that the financial industry will continue to take unsupportable risks if it is not permitted to suffer the consequences of its actions. As one observer noted: "As a bank bailout, TARP was if anything too successful. The banks were largely responsible for causing the global financial crisis which left millions of people kicked out of their homes, laid off from their jobs, or both. But then, with the TARP bailout, they rapidly bounced back; the bankers who remain — and that's most of them — are now anticipating bonus checks to rival what they were receiving at the height of the credit bubble. The little guy was hurt hard; the fat-cat bankers are smiling, unremorseful, and back to their old ways already" (Solomon 2010). In the words of Alan Blinder, a Princeton University economist: "The TARP spread a security blanket, tamping down risk spreads, and so in that sense it was successful. But it didn't prevent a wave of foreclosures, didn't result in the promised buying-up of toxic assets" — and left the mortgage market in many areas of the country in profound distress ("How Effective Was the TARP," The Economist, 2010).
The Federal Reserve Bank of Boston Homeowner Relief Plan
To help some of the innocent victims of the mortgage crisis, a policy proposal was advanced by Jeffrey Fuhrer and his colleagues (Foote et al. 2009) on the Federal Reserve Bank of Boston website to provide greater relief to homeowners. While some homebuyers were criticized for attempting to capitalize on the housing bubble by "flipping" houses, this proposal would help individuals in their principal residences "afford mortgage payments...because they have suffered a significant income disruption and because the balance owed on their mortgage exceeds the value of their home. These homeowners represent a subset of the population of distressed homeowners, but according to our research they face an elevated risk of default and are unlikely to be helped by current foreclosure-reduction programs" (Foote et al. 2009: 1). The emphasis on principal residences in the language of the plan underlines its moral character — these were not, the plan stresses, people who took on more than they could afford, but individuals who were negatively affected by a market that had spiraled out of control. Had there been no crisis, they would not be "underwater" on their mortgages. Unlike the banks, these individuals were not "too big to fail," and thus the concept of moral hazard remained fully operational in how the government evaluated their claims.
The plan would reduce the monthly payment of qualifying homeowners by 25% or more, as the government paid a significant share of the mortgage payment to the bank (Foote et al. 2009: 5). The principal owed would not be affected — only the borrower's monthly payments. The borrower would also be required to present evidence of a significant negative event that had disrupted his or her ability to pay, such as a job loss and negative equity in the home (with "significant" defined as an income loss of 25% or more) (Foote et al. 2009: 5). Unlike the provisions of TARP for the banks, no toxic assets would be acquired by the government. The borrower would continue to hold all responsibility for the home. Two implementation versions were proposed: "In one version, the assistance comes in the form of a government loan, which must be repaid when the borrower returns to financial health. The second version features government grants that do not have to be repaid. In either case, the homeowner must provide evidence of negative equity in the home and of job loss or other significant income disruption" (Foote et al. 2009: 2). Once the borrower's income stream resumed, he or she would resume payments to the bank (Foote et al. 2009: 10).
Conclusion: Too Big to Fail, Too Powerful to Punish
Regardless, it seems clear that TARP did not perform as well as hoped in helping homeowners remain in their homes, and any notion of subjecting the banks to the consequences of the moral hazards created by their lending practices was set aside in the interest of stabilizing the broader economy. No major financial legislation was enacted to prevent such a crisis from occurring again — a stark contrast to the sweeping regulatory reforms that followed the Great Depression. "Too big to fail" clearly also meant too powerful to be punished — a standard applied to banks but never to the homeowners who bore the greatest human cost of the crisis.
Works Cited
Calmes, Jackie. "Audit Finds TARP Program Effective." New York Times. 20 Dec 2009.
Carter, Adrienne. "Big Banks Pay Back TARP Funds — But Still Get Government Aid." Bloomberg Businessweek. 6 Oct 2009.
Foote, Chris, Jeff Fuhrer, Eileen Mauskopf, and Paul Willen. "A Proposal to Help Distressed Homeowners: A Government Payment-Sharing Plan." Federal Reserve Bank of Boston Policy Briefs. 2009.
"How Effective Was the TARP?" The Economist. 8 Oct 2010.
Salmon, Felix. "Judging TARP." Reuters. 10 Oct 2010.
"Troubled Asset Relief." Investopedia. 2012.
Weidner, David. "ACLU Bias Suit Ties Subprime to Race." MarketWatch. 15 Oct 2012.
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