How Many Toxic Assets Can I Get for $700Billion?

Apparently, none.

The plan last fall under Secretary Paulson, and then reiterated by Secretary Geithner again this spring, was to use the $700 billion in TARP money to purchase toxic assets in order to get them off of bank balance sheets. This was intended as a way to stabilize the financial sector; but for various reasons the purchases never took place.

The current consensus seems to be that the worst of the financial crisis is behind us and there isn't a need to buy these assets from the institutions holding them. If it wasn't the removal of these assets that helped the banks weather the crisis, then what was it? In this case I think blogger Matthew Yglesias gets it exactly right:

Rather than seeking congressional authority for vast new spending on recapitalization and pissing off wealthy financiers by seizing banks and firing people, they took the view that a strategy of regulatory forebearance and loose monetary policy would let the banks recapitalize themselves through profits.

And here's James Kwak at The Baseline Scenario:

If the banks can make money fast enough to compensate for the toxic assets they never got rid of – which is the administration strategy – then that is good in that it reduces the risk of another financial system panic.

I'm not quite cynical enough to suggest that Paulson & Geithner never intended to buy a single toxic asset. It seems more likely that while this plan appeared to be a great idea on paper, it just became entirely too complex to implement. Given that, and the fact that the Congress had already authorized a substantial sum of money with rules loose enough to allow them to change their plans, that is what they decided to do.

So if letting the banks recapitalize through profits ultimately works (and there is no guarantee that it will) then score one for the technocrats. What would the implications of this success be for future congressional intervention in matters economic or otherwise?

Perhaps most importantly, could the utter failure of the TARP to be anything like it was described during its consideration and passage into law serve as a cautionary tale for other legislative initiatives? What if the health care debate results in a law touted as providing universal coverage or bending the cost curve? How certain can we be that either stated goal will ever be accomplished?

At the very least, I think Secretary Geithner owes me something for the pixels I sweated over producing this description of the Public Private Investment Program (PPIP), a species that will probably never exist. Now I know how unicorn biologists feel.