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Home Publications Blogs Beat the Press Robert Samuelson's Troubled TARP Arithmetic

Robert Samuelson's Troubled TARP Arithmetic

Monday, 28 March 2011 04:27

We know that arithmetic is not the strong suit of the Washington Post and Robert Samuelson drives this point home again today with his discussion of the TARP. Samuelson tells us that TARP is now projected to cost just $19 billion and that the final cost may actually be lower. He also tells us that the alternative to TARP, bank nationalization would have been far more costly. And, he said that without TARP the unemployment rate "would be 11 percent or 14 percent; it certainly wouldn’t be 8.9 percent."

Okay, let's take these in turn. First, the idea that the TARP cost almost nothing is based on some very shoddy accounting. Samuelson apparently does not understand the idea of money carrying an opportunity cost.

Suppose the government lent me $1 trillion for 10 years at 1 percent annual interest. In the Robert Samuelson world, the government is earning a $100 billion profit on this investment ($10 billion a year for 10 years). Economists familiar with opportunity costs would instead see this as a huge loss to the government, since it is giving me an enormous loan at an interest rate that is several percentage points below the market rate.

We saw how this worked with the TARP when Warren Buffett reported earning twice the money on his investment in Goldman Sachs which was half of the size of the investment from Treasury. Buffett got the market rate of return on his investment, the difference was a subsidy from taxpayers to the shareholders and executives of Goldman. The same story was true with the other TARP loans, as well as the even larger amount of money lent through the Fed as well as the guarantees provided by the FDIC.

This gets back to the comparison with the option of nationalizing the bankrupt banks, which Samuelson asserts would have been far more costly. Each year, the large banks are pulling over $100 billion a year out of the economy in profits. They also pay their executives tens of billions of dollars each year. Let's say that this sum comes to around $150 billion a year in total or 1 percent of GDP.

This money would not be pulled out of the economy if the banks had been nationalized. This is money that would have been available for other purposes (e.g. it could have paid for higher wages for ordinary workers) rather than supporting the consumption of bank shareholders and executives. The way this would work practically is that the Fed could stimulate the economy more with lower interest rates (think of some future point when the economy is closer to full employment) allowing for workers' wages to raise, because we do not have $150 billion or so in consumption by these shareholders and executives.

If we take the discounted value of this sum over the next thirty years it would come to more than $3.5 trillion. This can be viewed as the cost of the TARP and related rescue programs compared with nationalization. (Samuelson tells us that nationalization would have been complicated, so was TARP. Life's tough.)

Finally, Samuelson tells us that without the TARP unemployment would be "11 percent or 14 percent: it certainly wouldn't be 8.9 percent." This is incredibly bad logic. These numbers are based on a counter-factual in which the government and the Fed let the financial system collapse and then did nothing by way of response. These are undoubtedly reasonable projections of the unemployment rate under such circumstances, however that is not a plausible counter-factual. 

If Samuelson paid attention to what he was writing he would note another possible response, bank nationalization. If the Fed had taken over the bankrupt banks and then flooded the system with money (as it did with the TARP and related Fed liquidity programs) then we would not have seen the rise in unemployment from these projections. 

Samuelson's analysis would be comparable to noting that a particular fire hose was used to put out a school fire, saving dozens of children. Samuelson would then tell us that this fire hose saved dozens of children. While this would literally be true, if that particular fire hose did not exist, the firefighters would have extinguished the fire with the other one they had on the truck. In other words, the alternative was not that the children would die, the alternative was that they would use a different hose.

In the same vein, the alternative to TARP was not that we sit around with a collapsed banking system waiting for the economy to sort itself out on its own. The alternative was a different set of monetary actions to boost the economy. It is silly to tout this no-hose story as the counter-factual to TARP.

Comments (14)Add Comment
Louisville Juice
written by Tom Johnson, March 28, 2011 6:28
I don't think it's fair to consider profits money pulled "out of the economy." As you note, profits support "the consumption of bank shareholders and executives."

This may not be the most desirable outcome, but particularly in an economy where demand is falling it is far more than just pulling money out of the economy. Cutting the deficit would be pulling money out of the economy, because the money simply disappears; increasing the deficit to bail out banks in fact puts money into the economy, even if it inefficiently does it by giving more to the wealthy.

Also, charging an opportunity cost to deficit spending, while technically true, seems unrealistic. What is it that we might have invested $700 billion in during an economic collapse that would bring us such a high rate of return? And, politically, what is it that makes you think we could get Congress to improve massive deficit-financed investment for the sake of profit only, rather than for the sake of economic stability?
They Could Have Had a V8 Instead of TARP
written by izzatzo, March 28, 2011 6:35
Samuelson's analysis would be comparable to noting that a particular fire hose was used to put out a school fire, saving dozens of children.

Exactly Whose Your Nanny. Samuelson doesn't understand that under free market competition firefighters have choices among a wide range of fire hoses.

Marketing and advertising experts in Monopoly Propaganda USA who specialize in opportunity cost education for consumers were the first to realize the unique value of TARP.

If competition for fire hoses actually existed, there would be a lot less fires to start by arsonists like Samuelson who then assess huge firefighter fees under the American Rescue Hero Business Model for the forced collection of economic rent.

Stupid liberals.
..., Low-rated comment [Show]
written by skeptonomist, March 28, 2011 7:48
We have not yet seen the real cost of TARP, which will appear in the next financial collapse. Nothing has been done to prevent it.
written by Spike, March 28, 2011 7:49
Aren't we also forgetting the fact that the banks "profits" are largely due to suspension of mark-to-market and a monstrous fleecing of savers through zero interest rates? Robbing Peter to profit on your investment in Paul, doesn't mean that your investment in Paul was a smart one.
$150 billion given to banks, $135 billion taken from seniors
written by Jorge, March 28, 2011 8:12

It appears that if we had managed the banks intelligently, one of the uglier aspects of the healthreform law, the cutbacks in spending for seniors' vision and dental care, might have been easily avoided.
Nationalizing All the Failed Banks Would Have Been Sooo Easy!
written by Paul, March 28, 2011 8:58
And it could have been done much faster than TARP!

Hmmm, I wonder why Bernanke never wanted to do it? Perhaps Ben is being paid off by the bankers. Yeah, that's gotta be the reason.
written by ep3, March 28, 2011 9:57
First, I would say, yes unemployment would be higher if we had chosen to nationalize the bad banks. All those unemployed CEOs, CFOs, etc. who would rather draw unemployment than go work at walmart.
Second, tho I disagree with the assumption that the unemployment numbers wouldn't have risen under bank nationalization. We were/are running a fraudulent casino economy, based upon bubbles. A gov't run system would have ended those bubbles. Without those, we would return to a state of slow growth. The accelerated expansion gave many more ppl jobs than were truly available without that bubble. Say in non-bubble economy there are only 150,000 jobs created a month. Yet in bubble economy it is 300,000. What do we do with those persons that live in that difference? Maybe to rebut my own point, we are offshore outsourcing at an accelerated pace so that those unemployed can become employed again.
If tarp worked, then what is the big problem?
written by Thomas, March 28, 2011 10:23
To use your firehose analogy, the children did, in fact, get saved, which is kinda key. I think the cost of a collapse would have been much higher than Samuelson estimates.

So the government didn't get as good a return as Buffett. So what? A 1% return is still better than a loss. So maybe the government subsidized the profit of Buffett. Not cool, but, if, in the same action they also preserved the life savings and the job of ordinary Americans like me, that is still a positive in my eyes.

One alternative you mention is nationalizing the banks. There may be a million Americans who would support that, but for every one that does there are five who would be screaming 'socialism' in a crowded theater.

You seem to be saying that if the Girl Scouts don't sell cookies, that going broke is not the only alternative because they could sell coconut tofu instead. Coconut tofu is healthier than processed cookies, but the public isn't gonna buy it.
. . .
written by K. Williams, March 28, 2011 12:47
"(Samuelson tells us that nationalization would have been complicated, so was TARP. Life's tough.)"

It's absurd to skip over this so blithely. Yes, life is tough. But it's much tougher in some situations than others. And nationalizing institutions the size of Citi and BoA -- even assuming that the government had the legal authority to do so, which it didn't -- would have been many orders of magnitude more complicated than TARP. TARP was not, in fact, all that complicated -- the government injected the capital, and in a couple of cases backstopped debt, and got a good result. Nationalization, by contrast, would have been an immensely complicated -- and far more costly -- enterprise.

I'm also mystified by the idea that profits and compensation are "pulled out of the economy." They're not pulled out of anything -- they're in the economy just as much as money in the government's hands is.
$150 Billion in Bank Profits is like pulling it out of the economy
written by LS Duende, March 29, 2011 3:57
$150 Billion in Bank Profits IS like pulling it out of the economy, because the rentiers who 'earn' this income have an extremely low marginal propensity to consume (MPC) it, as opposed to--under a nationalization scheme--using it as a transfer payment to a more worthy group lower on the socio-economic ladder; i.e. one that did not systematically mal-invest and defraud and accumulate only to derail the American economy. Nationalization would have insured future financial market stability by preventing future financial excess. And all while diminishing these rentiers massive influence on politics today. Yeah, wow, gosh, that would have sucked. Thank god, instead, that we returned to the status quo ante bustum. No worries there.
Also, rentiers do not INVEST
written by LS Duende, March 29, 2011 4:05
Also, rentiers do not INVEST, they speculate in currencies, and other products OVERSEAS. That is why countries around the world were/are up in arms over the second round of quantitative easing: all that money goes overseas through banking intermediaries. And when these rentiers do take their privileged profits, again, their MPC is freakishly low, versus, say, the lower middle class or working class, who tend to spend almost all of their disposable income on consumption. Which group stimulates demand more? The MPC gives us that answer, it is intuitive and so easy to apprehend. Apologizing on behalf of rentiers is not.
written by izzatzo, March 29, 2011 7:18
Behold the art form of economics per LS Duende, defined by Wikipedia as the undefinable ...

El Duende is the spirit of evocation. It comes from inside as a physical/emotional response to music. It is what gives you chills, makes you smile or cry as a bodily reaction to an artistic performance that is particularly expressive.

Folk music in general, especially flamenco, tends to embody an authenticity that comes from a people whose culture is enriched by diaspora and hardship; vox populi, the human condition of joys and sorrows.
How Banks Hoard Money
written by NewsFromAnnArbor, March 29, 2011 10:31
Banks hoard money by taking depositor's money and the Fed's money and buying T-bills instead of making loans to consumers or small businesses. Hording money this way is like hiding money behind a wall; it does not change hands often enough to maximize economic activity.

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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.