TARP: A Classic Study in Poor Contingency Management by the Government
Last week Neil Borofsky, Special Inspector General of the Troubled Relief Asset Program, said that a number of the bail-out’s key goals “have simply not been met.”
The question I have is who outside of Washington thought they would be met. If you look at TARP from a behavioral analytic perspective, it is clear to anyone who knows anything about behavior that it would never work.
It has been pointed out by many writers that TARP funds served as a reward for risky lending practices and other money dealings. Even Congress was surprised at the “business as usual” behavior of the banks that received the money. If a bank was poorly managed and it received billions of dollars, what behavior would that change? They still had lavish meetings in exotic places and they continued to give big bonuses. Why not? What gets rewarded gets repeated. They fact that they continued to do what they had always done was proof that the bailout, even if inadvertently, provided reinforcement for those behaviors.
In an interview on Fox news Barosfky said that it’s “hard to see how any of the fundamental problems in the system have been addressed to date.” I can’t help but think of a problem faced by many parents of teenage boys. The son has a habit of not completing school work. He comes to mom or dad and says he is going out with a friend for the evening. The parent says,”You are not going anywhere until your homework is done,” at which point the son begins to plead his case. Finally, worn down by his arguments, the parent says, “Alright, I am going to let you go if you promise me that you will come back in time to do your homework before you go to bed.” There are a great many parents (some of them obviously work for the Federal Government) that don’t realize that they have just positively reinforced the son to make promises, not to do homework.
Next time, he will make a better, more convincing case for going out without doing his homework first. If you give a bank billions of dollars and say, “I am going to give you this money but I don’t like it. Nevertheless, since we are in such a bind I am going to give it to you anyway but with the understanding that we have to work on fixing the system” the bankers probably agreed they needed to do that and went on their merry way with a big sigh of relief.
If you don’t understand contingencies of reinforcement, you don’t have a prayer of fixing the system in any efficient and effective way. What incentive was there in the TARP for personal bankers or mortgage brokers, people at the frontline of the financial institutions to change their behavior? If the consequences stayed the same for people at that level of the institution, what behavior change would that promote? What consequences were there for managers to change their behavior to support the changes needed at the frontline of the bank? Most of the TARP recipients did not think about planning the consequences for those people who deal with the customer as the critical activity for promoting culture change. If the consequences for behavior change are not right, the results will not be right and the culture will remain the same.
They should be planned first, not last. Unfortunately in the case of the financial institutions, as far as I can tell, they were not planned at all. The White House has proposed a tax on big banks. For the love of Pete how will that increase lending to consumers and prevent foreclosures? When you get the contingencies of reinforcement right, reaching the goals of TARP is a no brainer. When you don’t know the basic laws of behavior, reaching those goals has about the same probability as winning from an airport slot machine.