The biggest impact of TARP is that investors and rating agencies know that the biggest banks are ‘Too Big to Fail.' They suspected it before, but now they know.
One of the reasons for that continued certainty has been the Treasury Department’s handling of TARP.
Treasury has been bad, but not awful, at ending the notion of ‘Too Big to Fail.’ They have moved forward on ‘living wills’ for big banks, but there’s been no movement on automatic debt-to-equity conversions. It looks like that's been strangled in the cradle, but hopefully that’s not the case. Furthermore, it doesn’t look like equity requirements on banks will be raised in the near future. Essentially, everyone wants private debt to keep growing.
The lesson from this is that governments have to plan for financial crises before they happen. And they have to plan for crises taking into account the long-run cost. We're living in Keynes's ‘long run’ right now, and we're all very much alive.