The 2007-2010 financial depression caught the American government unaware, prompting it to consider a number of methods for intervention. To safe the ailing economy, bailing out banks became the most significant intervention method that the Bush and Obama administrations used. However, political interventions and corruption cases prevailed.
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In this podcast, Neil Barofsky informs Russ Roberts about the cases of corruption, government failures, poor planning and the role of the Wall street during the time of bailing out the banks.
Barofsky acted as the first Special Inspector General for the TARP program. Barofsky’s main theme in the arguments concerns the role that the government played during the crisis, especially in terms of bailing out corporations to avert the effect of the crisis. The interviewee brings about the idea of bureaucracy and political aspects that contributed to the problem, highlighting the corruption and ineffectiveness in the government when bailing out the institutions.
Inefficient crisis prevention program
Barofsky argues that prior to the government’s idea of bailing out the banks affected by the crisis, Washington’s ineffective nature of mitigating and controlling credit crunch became evident. Specifically, the government lacked an effective financial control structure to monitor the behavior of institutions. This created many loopholes in the financial system and allowed banks to become rogue institutions by investing in real estates and other related bonds.
Barofsky states that the government realized much later that the rogue nature of the bank was about to cause a great depression (“Barofsky on Bailouts”). This reveals that Washington had a poor method of monitoring the nation’s financial institutions, allowing them to go rogue in investments (Friedman 56). Secondly, it reveals how the government is sluggish in responding to similar crisis, including the presence of loopholes in the available options for controlling the crisis.
For instance, Barofsky states that TARP was created haphazardly and money channeled to the banks without a proper watchdog institution in place, which allowed individuals and organizations to siphon much of the money used for bailing out the institutions. By the time the Special Inspector General for TARP was created and confirmed as the official watchdog for the TARP program, more than half of the initial $700 billion channeled to the banks had been used and a lot of it was not accounted (Friedman 72).
Quite clearly, this argument reveals the loopholes within the government’s level of control on the nation’s financial institutions. For instance, the government could not realize that buying the troubled assets from the banks was a major problem itself because the banks still needed cash, which they had exhausted in their wrong investments.
Lack of transparency during bailout: The corrupt nature of US banks and treasury’s role in protecting them
Another important issue that Barofsky reveals is the corrupt nature of the financial institutions and the role of treasury in concealing information from the public. For instance, during his time as the Special Inspector General for TARP, Barofsky noted that the banks did not want the public, including SIGTARP, to know what they were doing with the funds received as bailout, yet it was the taxpayer’s money. On its part, the Treasury refused to force the banks account for the money. Instead, the Treasury worked closely with the banks rather than attempting to monitor them.
Apparently, this reveals the poor level of transparency in both the financial institutions and the Treasury. From this argument, I note that the public must have been kept in the darkness as the banks misused the money for their benefits, yet the purpose of bailing them was to protect them from collapsing and in turn, they were expected to return value to the ailing national economy.
TARP’S efforts to make the banks account for the money received from the government applied were thwarted by the Treasury and the Congress, revealing that the two institutions did not like the idea of transparency in the process. It was clear that the banks were using the money to accomplish other activities that were not included in the program. In my view, this implies that although the crisis was solved by this and other efforts, the public lost a lot of money through corrupt institution and an ineffective Treasury.
The bureaucratic role of the Wall Street
According to, one of the major causes of the above problems was the political and bureaucratic influence of the Wall Street. The Wall Street has intensive control over the American politics and the financial system. According to Barofsky, the congress sought advice from the Wall Street before designing legislations. The treasury also seeks advice from the same bureaucratic group before designing the bailout program and other intervention methods.
In fact, Barofsky reveals the existence of a state of dependence between Washington and the Wall Street. In his duty as the TARP leader, Barofsky realized that there exists a revolving door between the government and the Wall Street. He argues that the government can hardly design a financial program, solve a crisis or enact a new financial law without consulting the Wall Street. He further notes that in most cases, the Wall Street gives the government the wrong guidance or advice because the individuals in the organization have some financial interest in the outcomes of any government program.
In my view, the Wall Street itself is made up of institutions and individuals with their own financial interest. In addition, I think the main problem is that Wall Street is not under the control of any institution, including the government. Therefore, I believe the Wall Street mislead the government. However, it is my opinion that the government should be blamed for the problem because it should have adequate control of the national matters.
The public and the taxpayers have confidence in the government organs, including the Treasury, the White House and the congress. These arms of the government should be accountable, yet they transfer their roles to the corrupt individuals and organizations at the Wall Street. The people did not send the Wall Street people to the congress or the presidency through the ball. Rather, the Congress and Washington should be held accountable for failing the public. In this case, I support Barofsky’s ideas.
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I tend to agree with Barofsky that the political institutions like the presidency and the congress should be involved in advocating for the public interest and reduce reliance on advisors like the Wall Street. In addition, I agree that the country needs a more effective treasury that will monitor the banks and other financial institutions to ensure that they do not go rogue in their investments.
“Barofsky on Bailouts”. Library of Economics and Liberty. New York. 2012. Web.
“Nocera on the Crisis and All the Devils Are Here”. Library of Economics and Liberty. New York. 2010. Web.
Allison, John. The Financial Crisis and the Free Market Cure: Why Pure Capitalism is the world economy’s only hope. New York: McGraw-Hill, 2013. Print.
Friedman, Jeffrey. What Caused the Financial Crisis? Philadelphia, PA: University of Pennsylvania Press, 2012. Print.
Kolb, Robert. Lessons from the Financial Crisis: Causes, Consequences, and Our Economic Future. Hoboken, NY: John Wiley & Sons, 2011. Print