The U.S. government’s bailout of financial firms through the Troubled Asset Relief Program provided taxpayers with higher returns than yields paid on 30- year Treasury bonds -- enough money to fund the Securities and Exchange Commission for the next two decades.Back in an October 2nd, 2008 post titled Bailout Can Work and at No Cost to Taxpayers I concluded:The government has earned $25.2 billion on its investment of $309 billion in banks and insurance companies, an 8.2 percent return over two years, according to data compiled by Bloomberg. That beat U.S. Treasuries, high-yield savings accounts, money- market funds and certificates of deposit.
The bailout will not solve all the economic problems we are currently facing. In fact, not even close. We still have a massive amount of leverage in the system that needs to be unwound. However, if this bailout is done right, it should help unfreeze credit markets (which are currently non-functioning) at little or no cost to taxpayers.More here and back to normal broadcasting (I promise)...
Not really...
ReplyDelete“The huge wealth transfer from fixed-income pensioners to the banks has helped the banks repay TARP,” Petzel said.
“These are all indirect subsidies the banks got,” Prins said. “So the TARP gains touted by the Treasury are only true if you ignore all the other costs.”
Nevermind the deliberate devaluation of the currency in which those "gains" are denominated. Nevermind that QE increases commodity prices at the expense of consumers. Nevermind that the GSEs stand to lose an order of magnitude more than the $25B claimed here.
Frankly this is a really naive argument and I'm surprised and disappointed to see it recited on this otherwise insightful blog.
This is the most important time to be on the right track for US economy because the recovery packages are still not enough too boost economy on the normal track as it was earlier.
ReplyDeleteAnon- you are naming arguments against monetary stimulus enacted by the Fed (and would have happened anyway) rather than TARP (a fiscal measure) involving the Treasury. Is there a connection between monetary and fiscal stimulus? Of course, but when I made the post back in October 2008 it was all, but assumed the majority of TARP money would be lost (so easy to forget).
ReplyDeleteAs for...
"Frankly this is a really naive argument and I'm surprised and disappointed to see it recited on this otherwise insightful blog."
Thanks! Love backhanded compliments!
Part of the problem results when these policies do work. One of the causes of the "Great Recession" was the "success" Greenspan had in micromanaging the fed funds rate whenever the economy was too hot or too cold. His success led to investors mispricing risk.
ReplyDeleteOne of the reasons our fiscal policy is out of control is because initially deficit spending pulled the economy out of depression.
The next time we get in a financial crisis the policy makers will be faster with the bailout. In fact, the policy makers will be less concerned with moral hazard with this perceived success under their belts. After all they'll say "...it worked last time".
Anyways, good call.
Jake, it's absurd to declare a "gain" when only looking at small portion of the government's market intervention. As the article points out, monetary stimulus has transferred far more wealth from savers to banks than they're ever going to get back on TARP. From the taxpayer's perspective that's a Pyrrhic profit.
ReplyDeleteThe US Government can improve any particular metric it wishes to:
Unemployment -> New New Deal
GM equity loss -> $20k Cash for Clunkers incentive
Deflation -> $10T in QE
House prices -> $50k tax credit
TARP losses -> steep yield curve
Why don't we do all of those things?
TARP losses -> steep yield curve
ReplyDeleteThis is where I disagree. TARP prevented the initial collapse from collapsing the entire economy (in my opinion) whereas the steep yield curve is to recapitalize the banking sector.
My comments were solely on whether or not the TARP would cost anything near the $700B of the entire plan. Go back and read commentary from that period (October 2008). While it wasn't perfect and there are secondary effects, I think it was wildly more successful (and less costly) than most thought at the time.
I disagreed. The reason you are getting your tarp money back is due to the massive bailouts, including GSEs. The government is projected to lose up to $363B on Fannie and Freddie through 2013. Where do you think the $363B go?
ReplyDeleteso, you are of the opinion that without TARP they would have let the GSE's go?
ReplyDeleteRegardless of the other costs that may or may not be TARP-related, this is calculating the return but is assuming we'll get the capital back, right? Aren't those investments equity and therefore at risk as opposed to treasury bonds which are presumably not (ignoring the possibility of technical default by inflation)?
ReplyDeleteSo you'd want to compare risk-adjusted return, and/or you can't do a full comparison until all the capital is back or written off I think?
Jake -
ReplyDeleteBut the proclaimed TARP success excludes the Fannie Mae/Freddie Mac taxpayer costs.
Am I missing something?
We are most definitely not getting our GSE bailout money back. Probably AIG too. By bailout them out, we indirectly bailed out the financials that were holding "worthless" MBS and CDS. Without these bailouts, I doubt the big financials could have survived.
ReplyDeleteHere's a better way to look at it:
ReplyDeletehttp://money.cnn.com/news/storysupplement/economy/bailouttracker/index.html#TARP
That indicates about half is paid back, and there were dividend payments amounting to 3.7% or so.
So, just 46.3% / $324B of money showing up and I'll be real positive on the thing...