The Myth about the Effectiveness of Government Loans in Financial Crises: A Case Study of the Troubled Asset Relief Program (TARP) and the Reconstruction Finance Corporation (RFC)

Abstract

Government loans to financial institutions have been regarded among government officials and mainstream economists as imperative in times of an economic recession. Arguments of proponents who favor government intervention through the inflationary monetary policy are derived from the convictions on tight money policy’s attribution to depression, credit expansion as non-inflationary, and the inadequate performance of the function of the capital market. The analysis of and compassion between the Reconstruction Finance Corporation (RFC) during the Hoover and Roosevelt Administrations and the Troubled Asset Relief Program (TARP) under the Obama Administration reveal that government loans to the financial institutions in financial crises have little effect on channeling the requisite resources, stabilizing the banking system and recovering the economy. Worst of all, the astronomical amount of money injected into the market unquestionably promises the inevitability of inflation and depreciation of the dollar.