CEPR - Center for Economic and Policy Research

Multimedia

En Español

Em Português

Other Languages

Home Publications Blogs Beat the Press Full Cost-Benefit Analysis of AIG Bailout

Full Cost-Benefit Analysis of AIG Bailout

Print
Friday, 09 March 2012 05:54

The Washington Post (a.k.a. Fox on 15th Street) did another one of its cheerleading pieces for the bank bailouts, telling readers that the country is likely to make money on its bailout of AIG in its lead editorial. This is of course silly since the Post's calculation assumes no opportunity cost for money.

Under the Post's definition of profit, if the government lent out $10 trillion for 30 year mortgages at 1.0 percent interest, and got this money paid back, then it would have made a profit. This is not the way that businesses ordinarily do their accounting.

The government made huge amounts of money available to AIG in the middle of a financial crisis. At that time, this money would have carried an enormous premium in the private sector. In other words, private firms would have paid very high interest for this money, especially since it came with an explicit guarantee that the government would not allow AIG to fail.

For this reason, it is absurd to argue that the government made a profit on AIG. It could have gotten a far higher return on almost any other use of this money.

The piece also concludes by implying that a full cost-benefit analysis of the bailout compared to a counter-factual where AIG was allowed to fail would almost certainly show that the bailout was a huge winner. This is far from clear.

It took Argentina 1.5 years to recover the ground lost during its financial crisis in 2001-2002. It then sustained solid growth until the world economic crisis brought its economy to a standstill in 2009.

While our economic leaders may not be as competent as those in Argentina, even if it took the U.S. twice as long to regain the lost ground, we would still have been back to 2008 levels of output by last fall and seeing strong growth now instead of the modest 2.5-3.0 percent growth rate projected by the Congressional Budget Office and other forecasters.

In addition, the country would now have a much smaller financial sector and would be seeing much less inequality as companies like AIG, Goldman Sachs, Morgan Stanley and other big financial firms would have all failed and be reorganized. This would almost certainly mean that the financial sector would not be the same drag on the economy in the future as it has been in the last three decade.

If the Washington Post really was interested in a full cost-benefit analysis of the bailout it would need to consider these aspects of the alternative world. It obviously does not want its readers to consider such issues.

Comments (10)Add Comment
profit and loss
written by Robert Mrtvola, March 09, 2012 8:00
I don't follow you, Dean. Just because a profit is grotesquely less than it could or should have been doesn't mean it's not a profit from an accounting standpoint. It's just not one that we (or the Post) should be impressed by. Surely opportunity cost is an economic concept, not an accounting one.
Tax treatments hid bailout
written by AndrewDover, March 09, 2012 9:16
Although there are sources like

http://projects.propublica.org/bailout/list/index

that show bailout scorecards for various companies, they neglect a large way in which Treasury hid the costs.

Treasury boosted the value of AIG assets by issuing a series of “Notices.” that exempted itself from the Sec. 382 rules for net operating losses (NOL).

Sec. 382 of the tax code limits the firm’s ability to use those accumulated NOLs, if the combined equity stake of any group of shareholders in a “loss corporation” climbs by more than 50 percentage points.

http://blogs.law.harvard.edu/c...ryforward/

"AIG Joins Citigroup, GM in Deferred Tax Asset ‘Hall of Fame"

http://www.cashflowanalytics.com/news.php?articleID=356


If they new owners had to pay normal taxes, then the recovery through share sales would have been less, and Treasury would have shown worse results. But less tax collection in the future does not show up in simple accounting.
...
written by skeptonomist, March 09, 2012 10:16
The real cost-benefit accounting will probably not come until the next crash. There is little point in arguing about temporary profit-loss on the books when the whole crash phenomenon is likely to be repeated before too long, since the institutions and behavior which led to the crash have not been changed. Attitudes about bailing out banks and insurance companies may be drastically different next time - or at least we can hope.
Dean, can you do the same analysis for social security?
written by pete, March 09, 2012 10:34
I.e., the opportunity cost of "investing" 12.5% of wages in the SS "fund" for somebody turning 65 today versus the "opportunity cost" of not having that money invested in stocks from say 1970 till now? I suspect using your analysis, which is spot on, that most retirees have have lost significant money. As John Bogel notes, 2% a year for 40 years piles up.



...
written by Andrew Clearfield, March 09, 2012 11:33
Journalists should never use the word "profit" when referring to a government program. To the average reader, profit means "good," but in the context of government programs, profit just means that money has been redistributed from one segment of the population (in this case the banks - if you ignore opportunity cost and accept that a "profit" really was turned) to another segment (the taxpayer). Many safety net programs are socially desirable, but they all turn a "loss;" likewise, the bank bailouts may have been bad (though I doubt it) despite turning a supposed "profit."

Government programs are either socially desirable or not, and that's how they should be evaluated. Such evaluations involve subjective value judgments which newspapers are understandably loathe to make - fine, but this is no excuse for resorting to lazy and misleading characterizations of programs as either "profit-turning or loss-turning."
forgot to mention
written by joe, March 09, 2012 12:02
that if the federal government turns a profit, then that means it's taking money out of the economy. The government makes the money, it doesn't have to get it from anywhere. It doesn't make a whole lot of sense to take about the government turning a profit.
BS Buyers' Remorse
written by Perplexed, March 09, 2012 2:32
-"In addition, the country would now have a much smaller financial sector and would be seeing much less inequality as companies like AIG, Goldman Sachs, Morgan Stanley and other big financial firms would have all failed and be reorganized. This would almost certainly mean that the financial sector would not be the same drag on the economy in the future as it has been in the last three decade."

Yes, and that financial sector would now be highly regulated because nationalized banks would not have been able to buy influence in the legislative process to prevent adequate regulations from being implemented. It would be nice to know just how "15th Street Fox" calculated in the cost of continuing on with largely unregulated TBTF banks. What were their projections for the timing and costs of the next crisis they drag us into? Simon Johnson had it right from the beginning, nationalizing the banks was the right option for the American public. Fear of the 1% losing a lot of money wasn't reason enough to allow this to continue unimpeded. Maybe Americans are too gullible and not up to the real challenges and responsibilities of self governing in a world of wealthy oligarchs?
The 1% Made the Decision, Remember?
written by beth in or, March 10, 2012 2:34
perplexed,

"Maybe Americans are too gullible and not up to the real challenges and responsibilities of self governing in a world of wealthy oligarchs?"

Just the ones conflicted, implicated, and insulated by wealth.
No way out of this one.
written by Perplexed, March 10, 2012 2:45
beth,

-"The 1% Made the Decision, Remember?"

"We the people" put them in power and continue to allow the 1r;s to buy, blackmail, and coerce our representatives. There's a perception among many that allowing oligarchs to fund campaigns and buy influence in exchange for contributions saves money for rest; a political "free lunch." This is just another perception that would never survive any serious cost-benefit analysis.

In a democracy there's not really much of question of who has the power, and therefore who is ultimately responsible.
10% return vs. 1% return
written by FoonTheElder, March 13, 2012 2:33
Warren Buffett got 10% on his loans to Goldman. How does that compare to the 1% the taxpayers got.

Write comment

(Only one link allowed per comment)

This content has been locked. You can no longer post any comments.

busy
 

CEPR.net
Support this blog, donate
Combined Federal Campaign #79613

About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

Archives