Brad Schaeffer, a conservative energy company executive, makes perhaps the most reasonable defense of TARP that I have seen. He compares the banking crisis to the fall of Enron and the panic that ensued in energy markets at that time and concludes that a private solution such as the one that rescued energy wouldn’t have worked with the financial services industry.

His argument is essentially a pragmatic one, that there existed no solution that was feasible without the use of the government’s balance sheet. He suggests that the alternative of letting the chips fall where they might have would have carried the seeds of potential disaster:

So I reluctantly support TARP knowing that it was unfair cronyism, even unconstitutional, but necessary nonetheless.   There are two rules in life. Rule (1) Sometimes life is unfair; Rule (2) Rule 1 will always be with us so long as people are what they are.  Middle Americans who played by the rules are suffering the effects of nefarious dealings from Wall Street, enabled by a socially engineering government and supported by many citizens who thought the music would never stop as they took out mortgages they couldn’t afford while thinking their rising house price would rescue them.

But punishing these good people further by allowing the country to (possibly) sink into a depression would have been a hollow justice.  Sometimes you gotta do what you gotta do.  Free-market capitalism and the constitution are among our noblest concepts and vitally important to the life-blood and character of this nation; they are what made us great, but they are not suicide pacts.  And I ask those of my libertarian friends who love no government at all, those who claim they would have let the banks die, to consider the history of fascist states and remember that the rise of dictators and despots is often through the exploitation of major social/economic upheaval.  America is not immune to this phenomenon.  I was not willing to run the risk should the free marketers have truly underestimated the severity of the crisis and chaos which ensued.

The conservative/libertarian rejoinder to this line of argument has been that in doing “…what you gotta do” you institutionalize government participation in private enterprise at a level that has heretofore been considered beyond the pale. Schaeffer acknowledges the issue:

Before anyone thinks I have become a turn-coat statist, I will say this with the utmost conviction: If going forward bailouts become the norm rather than a one-time mulligan for a once in a generation economic calamity that need not have occurred, then I will change my views on this.  If we cannot learn from what happened, if we cannot take the second-life granted by the American taxpayer to mend our ways, then the next time, I will happily agree to give Adam Smith’s invisible hand carte blanche to raze the city on the hill—for we’re just doomed anyway at that point.

Too soon Mr. Schaeffer may have the chance to test his resolve to resist future bailouts. Currently the central planning genie is working his magic in his natural home, Europe. But, between further bank losses on real estate and the possible debt default of one or more states or large municipalities we might see him quickly hop back across the Atlantic. The pressure to bailout California or Illinois would be irresistible and any attempts to thwart such rescue attempts, no matter how nobly couched in free market rhetoric, will be met with the obvious rejoinder that if we can save insurance, auto and banking enterprises then surely we can save millions in our various states.

Having compromised principles the impulse to resist further temptations to do so is dulled. After all, it worked well once and we seem to be no worse for the wear. But, of course, we are. The heavy hand of the state feels soothing in times of distress and only later do we suffer its abrasiveness. So, Mr. Schaeffer, you may willingly allow Adam Smith’s prescriptions to work their magic but I doubt your fellow citizens will feel inclined to follow you. Yes, TARP worked and unfortunately it did so in ways that we might rue well into the future.