How TARP and QE Led to the "Green New Deal"

The most important quote from the Financial Panic of 2008 came from President Bush: "I've abandoned free market principles to save the free market system."

The quote came in defense of TARP, the $700 billion bailout of the banking system, which many still mistakenly believe prevented another Great Depression. Many also think Quantitative Easing, the Fed's multi-trillion dollar purchases of Treasury and mortgage-backed securities, was also key in "saving" us from the free market. But the facts dispute this. QE began in September 2008, TARP was passed in early October, but the market fell an additional 40%. It didn't bottom until it was clear that mark-to-market accounting rules would be changed.

The Bush Treasury, the Fed, and the SEC were all aware of the problems mark-to-market was causing. The accounting rule forced banks to value securities at fire sale prices regardless of their actual cash flow. This eroded bank capital which scared away investors and caused an even greater impulse to sell. Many prominent bankers, economists, and politicians were very vocal about the damage the rule was causing. But the Administration rallied support from journalists and hedge funds (who profited from the carnage mark-to-market accounting caused) to support a massive growth in government. It was the wrong choice.

In the 1980s, losses at money-center banks due to defaults by emerging market countries, losses at Savings & Loans, and farm and oil bank failures were much larger relative to bank capital than subprime losses in 2008-09. But there was no mark-to-market accounting back then. The Reagan Administration gave these institutions the ability to grow themselves out of the problem, which many did during the economic boom of the 1980s. After giving them time, the banks and S&Ls that couldn't grow out of their problems were shut down. The banking system survived without a crisis. If the Bush Administration had followed Reagan's lead, the crisis would never have spiraled.