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Home Publications Blogs Beat the Press TARP Repayment and Legalized Counterfeiting

TARP Repayment and Legalized Counterfeiting

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Thursday, 09 December 2010 06:07

The news outlets that insisted Congress approve TARP or the world will end have been anxiously touting the prospect of repayments and possible profits for the taxpayers from one-time basket cases like Citigroup and AIG. It is worth noting that the question of the government showing a profit or loss on its loans to these companies has little to do with whether the bailout was a net benefit to taxpayers.

Suppose the government uncovered a counterfeiting operation. Instead of shutting it down, suppose it allowed the counterfeiters to print $1 trillion in counterfeit money and buy up the stock of legitimate companies. The counterfeiters would then give ten percent of this stock, worth $100 billion, to the government and shut down their counterfeiting operations.

By the TARP accounting logic, the taxpayers made $100 billion on this deal. In reality, the counterfeiters were allowed to lay claim to $900 billion of the country's wealth based on their counterfeit currency.

The situation with the TARP is similar. Through the TARP and the much larger Fed lending operations, the Wall Street banks were able to borrow money at far below market interest rates. This allowed them to make substantial profits at the peak of the financial crisis. They are now using the profits made with government funds to repay the government with interest. However, the shareholders, creditors, and top executives of these banks are now far richer than they would be if they had not been given access to public money at below market rates.

To imply that this situation has profited the taxpaying public as a whole because the loans have been repaid is extremely misleading, just as it would be inaccurate to imply that the country had benefited by getting a cut of the counterfeiters' profits. 

Comments (20)Add Comment
Orwell rip
written by frankenduf, December 09, 2010 7:52
always remember the Orwell-type propaganda: asserting an opposite as truth, like war is peace, ignorance is strength, and we all profitted from the banking fraud
GREAT COMMENT
written by Ron Alley, December 09, 2010 8:12
ONCE AGAIN, a great piece.
..., Low-rated comment [Show]
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written by the bunny, December 09, 2010 9:47
Yeah, Dean.
No one is worse off. There isn't a 20% U-6 unemployment rate. No one has been evicted from their homes.
And I have a new pony!
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written by izzatzo, December 09, 2010 9:56
By the TARP accounting logic, the taxpayers made $100 billion on this deal. In reality, the counterfeiters were allowed to lay claim to $900 billion of the country's wealth based on their counterfeit currency.


Extending the analogy for illustration, drop the counterfeit money and assume instead that upstream lenders in the financial sector had to bear 100% of the risk of a burst bubble as technically written into most loans for collateral terms and conditions at the downstream level, i.e. forfeiting the house was a legal out for the borrower.

$8T in deflated housing asset collateral would reflect that risk, and absent bailout from the government with real money, the only recourse is to aborb the loss when borrowers default. Then there's no 'wealth to lay claim to', which parallels the notion that $900T of principle is counterfeit wealth.
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written by liberal, December 09, 2010 10:01
K. Williams wrote,
It's true that the bankers are better off than they would have been had they not been allowed to borrow the money cheaply, but it's also true that no one is worse off.


False. You're leaving out that the subsidies to the banks aren't free for taxpayers.

These subsidies take many forms. (That is, a more pedestrian, less-funny way of saying what Dean is saying is that "TARP is only one piece of the puzzle.) Just some examples:
(1) Government bailed out Fannie Mae and Freddie Mac, even though there was no statutory obligation. Final cost is estimated to be between $150B and $250B. That's a direct transfer from taxpayers to bondholders.
(2) Banks are borrowing money at essentially 0% from the Fed, then making free money off of it by doing things like buying Treasuries at 3%, while at the same time not extending much lending to businesses for economically useful investments.
(3) There's not much evidence that holding rates at 0% really helps much. (I say this as someone much more concerned about deflation than inflation, by the way.) That penalizers savers, yet helps banks rebuild their balance sheets (see (2)). So the government is in effect taking money from savers and giving it to the banks. (This is nothing new; IIRC in the early 1990s something similar happened.)

There ain't no such thing as a free lunch.
hurt
written by David, December 09, 2010 10:22
No one is worse off??? And do you really think that TARP paid off the whole thing?? There's still some massive holes in those spreadsheets at the big banks; we just hope that they can fill them in soon enough, or we're in deep doo doo.
dataset on TARP
written by David Cay Johnston, December 09, 2010 10:43
Has anyone analyzed the TARP spreadsheets and then put up the data showing the outlays, the paybacks, the time value of money differentials, etc., so we can get a good, clear picture of what the TARP data mean?
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written by K. Williams, December 09, 2010 11:32
"(1) Government bailed out Fannie Mae and Freddie Mac, even though there was no statutory obligation. Final cost is estimated to be between $150B and $250B. That's a direct transfer from taxpayers to bondholders.
(2) Banks are borrowing money at essentially 0% from the Fed, then making free money off of it by doing things like buying Treasuries at 3%, while at the same time not extending much lending to businesses for economically useful investments.
(3) There's not much evidence that holding rates at 0% really helps much. (I say this as someone much more concerned about deflation than inflation, by the way.) That penalizers savers, yet helps banks rebuild their balance sheets (see (2)). So the government is in effect taking money from savers and giving it to the banks. (This is nothing new; IIRC in the early 1990s something similar happened.) "


None of this has anything to do with TARP. Dean was specifically attacking the idea that taxpayers made money on TARP, saying that instead it (that is, the capital infusions into banks) somehow cost taxpayers money. Nothing you -- or anyone else -- has said here demonstrates this. The question is: did the government's infusion of capital into the banks end up hurting taxpayers? Dean thinks his counterfeiter analogy shows it does. But it doesn't: helping the banks by investing in them and getting a sizeable return on that investment does not leave taxpayers worse off.

One other note: banks are not "borrowing money from the Fed at 0%" and investing it in Treasuries. The discount window -- where banks can borrow money from the Fed -- is an overnight window, and in most cases the money needs to be paid back the next day. It's not money the banks can park in Treasuries. And to the extent that they might be rolling it overnight, the amount of money they're making on that trade is trivial: total discount-window borrowing in recent weeks is around $45 billion for the system as a whole, so even if all of that were invested in 3% treasuries overnight, you're talking about a tiny fraction of bank earnings.
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written by K. Williams, December 09, 2010 11:37
"Extending the analogy for illustration, drop the counterfeit money and assume instead that upstream lenders in the financial sector had to bear 100% of the risk of a burst bubble as technically written into most loans for collateral terms and conditions at the downstream level, i.e. forfeiting the house was a legal out for the borrower.

$8T in deflated housing asset collateral would reflect that risk, and absent bailout from the government with real money, the only recourse is to aborb the loss when borrowers default. Then there's no 'wealth to lay claim to', which parallels the notion that $900T of principle is counterfeit wealth."


But this just shows how flawed Dean's analogy is. If all the borrowers had defaulted, and the creditors had had to bear the full brunt of the losses, taxpayers wouldn't have been any richer. That wealth wouldn't exist anymore -- it would have been wiped out. Dean seems to be implicitly saying that in the absence of TARP, society would have had a claim on the $900 billion in wealth (in his analogy), instead of the bankers having it. But this isn't true -- that wealth would just be gone.
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written by jerry, December 09, 2010 2:37
It's true that the bankers are better off than they would have been had they not been allowed to borrow the money cheaply, but it's also true that no one is worse off.
People who could have made money lending to them at market rates are worse off. If you are going lend money to someone at 10% and the govt comes along and says "we'll lend at 5%", then you are worse off. The Fed lent 3.3 trillion dollars. Hard to believe that other potential lenders were not harmed by 3.3 trillion of below market loans. That could only happen if there was not a single person ready to lend money to these businesses.
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written by izzatzo, December 09, 2010 3:13
If all the borrowers had defaulted, and the creditors had had to bear the full brunt of the losses, taxpayers wouldn't have been any richer. That wealth wouldn't exist anymore -- it would have been wiped out. Dean seems to be implicitly saying that in the absence of TARP, society would have had a claim on the $900 billion in wealth (in his analogy), instead of the bankers having it. But this isn't true -- that wealth would just be gone.


True, the wealth was already gone, wiped out in zero sum fashion with losses borne either by homeowners or lenders, but it also had nothing to do with taxpayers and bailouts at that point.

Baker doesn't suggest that society would have had a claim on $900B absent TARP in zero sum fashion as well. That was the point of the counterfeit money example.

The $900B represents an incremental amount, albeit artifical, over and above the baseline of total housing asset value after the bubble burst, designed to restore financial credibility to pre-bubble levels on behalf of lenders ... or at least to the cash value amounts paid for said toxic assets in combination with loans heavily discounted below market rates.

That the lenders who caused the massive failures in the first place were rescued and survived to continue earning huge economic rents along with continued too-big-to-fail status in moral hazard fashion, makes the differential interest rate subsidies received look like peanuts.

For taxpayers to remain 'neutral', the tortured logic would have to be so narrow as to argue that robbers can rob banks without imposing cost on others, in the form of forced cash-on-demand loans, as long as they pay them back on terms and conditions set by the robbers themselves - not in a competitive market.
R u kidding? I was worse off
written by JL, December 09, 2010 5:05
As Jerry said, the below-mkt rate deprived the gov't earning higher return and therefore our revenue was lowered than could have been. Everyone (well, except the powerful and affuluent ones) suffered.

TARP was critically needed bc we needed to prop up the banking or the economy would collapse, according to the smart people. Another way to prop up the economy was to give me a taxpayer money so I could spend to prop up the economy as well. My consumption will also increase gov't tax revenue.

Not every TARP receipients have paid back.
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written by K. Williams, December 09, 2010 5:32
"If you are going lend money to someone at 10% and the govt comes along and says "we'll lend at 5%", then you are worse off. The Fed lent 3.3 trillion dollars. Hard to believe that other potential lenders were not harmed by 3.3 trillion of below market loans. That could only happen if there was not a single person ready to lend money to these businesses."


Well, there was no one ready to lend money to these institutions (or just about any institution) at anything resembling a market rate -- that's why the Fed had to start buying commercial paper. More important, this is not what Dean is saying -- he's saying it's "inaccurate" to say that the taxpaying public profited. And this is absolutely wrong. You can say it didn't profit as much as it might have, but it absolutely did profit. Bankers profited more, no doubt. But taxpayers are better off because of TARP than they would have been had it not been passed. Period.
Correct, But...
written by Charles Peterson, December 09, 2010 10:59
The real question, still in my mind, is what else could the government have done. Well I have a general idea, set up "People's Banks" to replace the corrupt and insolvent private institutions. I can't remember when/if Dean wrote about this. But it's hard to imagine this would have been done with or by our corrupt government, and even with actual thinking democracy and truthful media it might have been rather difficult to pull off quickly enough to avoid mass suffering. The details or at least the outline really needs to be described and understood so we may be prepared next time, like 2012 perhaps? Dean ought to give a pointer to his work on on alternatives-to-TARP every time he pokes holes in the arguments of TARP defenders.

So the first question is, "compared to what"? And I note that Dean is using a very broad notion of "profit" himself, not limited to "financial profit", so making the question broader is not only fair but essential.

My second question is why Dean isn't commenting about the Obama Sell Out here on his blog, when he's said some things that could be interpreted as being favorable to it elsewhere (such as, we could always raise taxes later). Right now is, IMO, a tiny window in which we can finally begin rolling back trickle down economics by letting all the Bush tax cuts expire. It's hard to see when the next such opportunity will come around.

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written by liberal, December 10, 2010 9:44
K. Williams
None of this has anything to do with TARP.


Wrong. Baker wrote,
Through the TARP and the much larger Fed lending operations...


Thanks for trying, though.


But it doesn't: helping the banks by investing in them and getting a sizeable return on that investment does not leave taxpayers worse off.


Yes, of course it does, because there are many investments, of which TARP is only one. I notice you haven't even tried to counter the GSE example.

Furthermore, you clearly know nothing about economics, because you clearly aren't looking at the opportunity cost. (I.e., comparing to schemes where the banksters aren't handed money.)


The discount window -- where banks can borrow money from the Fed -- is an overnight window, and in most cases the money needs to be paid back the next day.


ISTR that with the crisis came multiple lending facilities. I suggest you actually research the subject instead of defending bankster scum.

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written by K. Williams, December 10, 2010 10:52
"Furthermore, you clearly know nothing about economics, because you clearly aren't looking at the opportunity cost. (I.e., comparing to schemes where the banksters aren't handed money.)"


I figured someone would bring out the old "opportunity cost" argument -- it's the last refuge of people who recognize that TARP actually made money for taxpayers but can't actually admit it. But it's a bogus argument -- had there been no TARP, that money would never have been appropriated for anything else, so there would have been no gains. Unless you can plausibly tell me that Congress would have appropriated $700 billion to put into some other, better "opportunity" in the fall of 2008 -- and you can't say that, because it's nonsense -- then there was no opportunity cost, because there was no other opportunity that was foregone. In effect, the government borrowed money at 3% and got a better than 10% return on its investment in the banks. Taxpayers are better off for it.

As for all the other programs that the Fed used to help the economy, again I don't know what point you think you're making -- the Fed would have had to do these programs even in the absence of TARP (in fact, it would have had to do them on a bigger scale had TARP not been enacted) so their costs, such as they are, are irrelevant to the question at hand, which is, "Did the decision to infuse equity into the banks in the fall of 2008 cost taxpayers money?" Dean says yes. He's wrong. And no whining about supposed "scum" on your part will change that.
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written by izzatzo, December 10, 2010 12:52
You have unused sardonic emoticons on your desktop forehead. To remove these icons, go to Command and Control Panel and click on Delete Homemade MSM Economics.
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written by ZINC, December 11, 2010 7:07
Any suggestion that the people were "paid" back for the extension of TARP funding is ludicrous unless interpreted as "the fool deserves what he gets".

The taxpayer essentially paid valuable assets (the full faith and credit of the people in the form of cash) at a fictitious price (a counterfeit price) for assets that were worthless (bankrupt banking institutions). The assets were worthless, the full faith and credit priceless, thus giving to the transaction a massive tangible worth equal to the value of the tax payers full faith and credit, not the banking assets. However, the taxpayer did not obtain ownership of the derived value, which was transferred to a select group of private citizens. The taxpayer received some of their cash back, less a large measure of the lost value of the full faith and credit from the ensuing carnage. A carnage caused by the select group of private citizens who ended up with the lions share of the value of the transaction, which is derived from rightful value of taxpayers'asset, the full faith and credit.

This was the greatest swindle in human history and it continues on a massive scale. The banking industry would collapse tomorrow if they were forced to mark to market the value of the drek they still hold, haven't sold as stocking stuffers to Freddie and Frannie under the direction of Lords' Greenspan, Geitner, Bernanke, Rubin, Summers, Bush, et al.

Not to mention the artificially low interest rates that are depriving savers a fair, risk free, return, the trillions in lost income being paid by the less fortunate among us, etc.
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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.

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