This week marks the three-year anniversary of the collapse of Lehman Brothers, which sparked a global financial panic. The U.S. government intervened to stem the contagion with the Troubled Asset Relief Program, a.k.a. TARP.
As worries over the European sovereign debt crisis worsens, many continue to wonder if we're headed down a similar path as in 2008. Just yesterday, the world's central bankers — including the U.S. Fed -- vowed to offer liquidity until year-end to help support European banks. (See: Fire Bad! Free Money Good! Traders React to Global Central Bank Bailout)
Yes, that right. Another bank bailout. It's just focused in Europe this time.
Neel Kashkari, head of global equities at Pimco, and former U.S. Assistant Secretary of Treasury who oversaw TARP, does not think we're headed for another global crisis and says U.S. taxpayers have very little to worry about. He says a global financial contagion "is certainly possible" though probably not likely to happen.
"I think you will see the ECB, the European Central Bank, willing to take much more risk than it is taking today to try to preserve the integrity of the Euro zone," he tells The Daily Ticker's Aaron Task. "Remember if you go back to 2008 we were facing a potential collapse of our financial system, but we were not facing the potential fragmentation of 50 states and the disillusionment of the United States of America."
Since the odds of a successful, albeit painful, resolution to Europe's problems is much more probable in Kashkari's view, he believes the U.S. is right to step into the fray to help. He also points out that should the odds tip the other direction the consequences could be devastating to not only Europe, but the global economy.
"If Europe were to disintegrate or if Europe were to have a disorder unwinding of the euro area, it would plunge Europe into a deep recession, maybe bring the global economy into a deep recession and that would directly or indirectly effect American taxpayers and American jobs," says Kashkari.
Reflections on TARP
The TARP program was widely controversial at the time of its implementation in October 2008 and remains so today. It gave the U.S. Treasury authority to purchase up to $700 billion in bank assets to slow the subprime mortgage crisis and strengthen bank balance sheets.
Kashkari acknowledges the program to save the banks was politically difficult and "distasteful", but absolutely necessary.
"If [the U.S. financial system] had collapsed, we could have plunged back into the Great Depression," he says. "The good news is, our programs worked. We stabilized the system. TARP is almost cost free and almost no cost to the taxpayers: I think it was wildly successful beyond our own expectations."
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