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Home Publications Blogs Beat the Press Gretchen Morgenson Makes the Case for an Accurate Accounting of Bailout Costs

Gretchen Morgenson Makes the Case for an Accurate Accounting of Bailout Costs

Saturday, 19 May 2012 15:15

The methodology that the Treasury Department is using when claiming that we made money on the TARP would imply that the government could make money by issuing a 30-year mortgage at 1.0 percent interest to every homeowners in the country. The vast majority of these mortgages would of course be paid off with interest, therefore the taxpayers would come out ahead.

This is ridiculous accounting, as Gretchen Morgenson points out in her column today. There is an opportunity cost to this money and if that is not taken into account, there is no way to say whether this lending is profitable. In the case of the TARP and related Fed lending programs, financial institutions were able to borrow trillions of dollars at far below market interest rates.

These programs may have been justified given the situation in financial markets at the time, however it is ridiculous to say that we made a profit on the lending based on the fact that most of the money was repaid with interest just as it would be ridiculous to claim a profit on 1.0 percent 30-year fixed rate mortgages issued by the government.

In the FWIW category, anyone saying that we would have had a second Great Depression absent this lending should be immediately ignored. The first Great Depression was caused by 10 years of inadequate policy response, not just the mistakes made at the onset. There was nothing that we did or did not do in 2008-2009 that would have necessitated a decade of incompetent policy.

Argentina was able to recover from a full-fledged financial collapse in less than 18 months. There is no reason to believe that Ben Bernanke and other leading policy makers are very much less competent than the people determining economic policy in Argentina.

Comments (4)Add Comment
Clearing the Payroll
written by TVeblen, May 19, 2012 8:18
For those who had to clear a payroll the week of 9/15/08, things did not look good. I don't think Treasury had any sense whether interbank lending in the US was going to freeze up and crash the payments system. Former Fed offical Larry Lindsay suggested in the WSJ that all payrolls should have been guaranteed but that the banks should have been left to fail. Then what? Move to quick "weekend liquidations" a la FDIC protocols? I don't think Paulson or Bernanke wanted to walk that blank on 9/16/08 - things were just too out of control. Here's a second point: suppose all the banks that needed money were forced to borrow at the 5-year T-note rate on, say, 9/16/08 at 2.64% (data from FRED FRB, 5-year constant maturity, series DGS5). If the treasury sold those bonds on 5/17/12 at a yield of 0.74%, they would have made a profit. This approach would have been a lot more transparent; buying up their stock and selling it would have been a lot cheaper and even more profitable. So I agree with Dean and Gretchen that these banks got a huge subsidy from the taxpayers and we should - in return - get a huge chunk of their increased market cap in payback. But please Dean, while we may have avoided a Great Depression w/o TARP, there should be little doubt that things were quickly spinning way the hell out of control that September.
Quantification please.
written by AndrewDover, May 19, 2012 10:29
The cost of these loaned trillions can be quantified, if you also know the length of the loan and the interest rates. Why no numbers?

Per MMT ...
written by Benedict@Large, May 21, 2012 9:42
There is no opportunity cost for money loaned by the sovereign fiat issuer, as the issuer always has unlimited funds, and can always respond to any other opportunities that present themselves. Similarly, it makes no sense to say that the sovereign issuer can "make money" on these loans, as profit cannot increase the already infinite money supply available to the sovereign.

Whether or not these loans were wise is another matter entirely.
written by Procopius, May 22, 2012 7:09
Much as I love this blog, I'm a little tired of this. I fully agree that the Treasury should have made a much larger profit. From Bagehot, in a crisis the central bank must lend freely, but at a premium rate. But to say they did not make A profit flies in the face of my Accounting 101. If your balance after the cost of goods sold is larger than the beginning balance, you've made a gross profit. Then that's subject to a lot of other stuff which people spend years learning about, but that's the basic. Maybe there was no NET profit, we probably don't have enough information to actually determine that, but there was a (small?) gross profit. Have a peanut.

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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.