Question

Without TARP, it was believed that which of the following would happen?

a. There would be large personal losses for stockholders and executives.
b. Several financial institutions would go bankrupt with more bankruptcies in the long run.
c. Home foreclosures would continue to increase and consumer spending would fall.
d. Credit would be frozen.

Answer 1

Without the Troubled Asset Relief Program (TARP), there was a potential for widespread bankruptcies among financial institutions, an increase in home foreclosures, reduced consumer spending, and a frozen credit market leading to a severe economic downturn.

Step-by-step explanation:

Without the Troubled Asset Relief Program (TARP), it was predicted that several catastrophic economic consequences could occur, including financial institutions going bankrupt, which could have resulted in a long-term chain of bankruptcies. Additionally, home foreclosures were expected to rise, consumer spending to decline, and credit markets to freeze, effectively halting economic activity. These issues would have deeply exacerbated the financial crisis, potentially leading to a severe and prolonged economic downturn similar to the Great Depression.

The fear was that without TARP, the financial market could collapse due to the interconnectedness of financial institutions and a lack of confidence in financial assets, particularly those backed by mortgages. The subsequent credit freeze would have halted consumer spending and business operations, causing widespread job losses and economic turmoil. The injection of cash through TARP was deemed essential to prevent these outcomes and to stabilize the economy to provide a foundation for recovery.