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Home Publications Blogs Beat the Press The Cost of the TARP: Yet Again

The Cost of the TARP: Yet Again

Tuesday, 26 October 2010 04:42

NPR told us yet again that we should be happy about the TARP because it really didn't cost us very much. Since the notion of the TARP free lunch continues to be promulgated widely let's look at it from a slightly different perspective.

In the past, I have made the point that the government made loans and guarantees to huge banks like Goldman Sachs and Citigroup at well below the market price during a financial crisis. This allowed these banks to survive and prosper. If the market had been allowed to work its magic, the shareholders of these banks would have lost all their holdings, their top executives would be walking the unemployment lines, and many of their creditors would have been forced to accept less than 100 cents on the dollar for their debt. This would mean that they would not have claim to trillions of dollars of the economy's wealth which they now have.

The costless TARP argument says that this should not concern us since the TARP did not add significantly to the national debt. So, let's try another approach.

Suppose that in October of 2008 we saw Goldman, Citi and the rest were in big trouble. Instead of the trillions in loans and guarantees from the Treasury and the Fed, we told the banks to just print up money. The government said that the banks should print as much money as they need to survive. The counterfeit money would then be circulated through the economic system just like real money, allowing the banks to survive. At the appropriate time the Fed would withdraw enough reserves from the system to ensure that the counterfeit money did not lead to inflation.

Okay, did the bailout cost us anything? Well, it certainly did not add to the deficit, we never gave the banks any public money. However, the decision to allow the Wall Street banks to freely counterfeit money for a period of time gave them a claim to the economy's wealth that they would not otherwise have. As a result, they are richer than they otherwise would be.

If the economy ever gets back to full employment, their wealth will reduce the resources available to the rest of us. Because the CEOs at Goldman, Citi and the rest have their hundreds of millions in wealth, as do their shareholders, they can command resources (e.g. homes, cares, labor) and thereby prevent the rest of us from enjoying the same resources. In short, the government's authorized counterfeiting cost us some of our wealth, even though it did not involve a single taxpayer dollar. This is the same story with the TARP/Fed bank bailouts.

Comments (18)Add Comment
TARP Costs
written by Ron Alley, October 26, 2010 6:15
All of those who insist that TARP has cost nothing do two things. Dean points out the first. TARP doesn't include the special credit lines the federal government has created.

Second, they don't include the value of debt-backed securities the federal government has purchased as part of the bank bailout. What is the true value of those securities? I doubt anyone outside the Federal Reserve and the Treasury knows. And, as usual, the Fed and the Treasury ain't talking. Do you think the banksters sold the federal government those debt backed securities most likely to be paid off? After all, the object was to get the "bad assests" off the banks' balance sheets.

Perhaps the worst part of all is that the Federal Reserve and Treasury almost surely fail disclose the truth about their dealings with the banks to Congress. What happens when Bank of America forecloses on a mortgage and the federal government holds all or some of the securities backed by that mortgage? Surely Bank of America buys in the home at the mortgage sale auction and eventually resells the property. What is the federal government's cut? When does the federal government receive its cut? Who actually enforces the federal government's claim against Bank of America? When does any difference between the federal government's cut and the value of the security backed by the foreclosed mortgage reach the balance sheets of the Federal Reserve and the Treasury?

written by Mich, October 26, 2010 7:21
"As a result, they are richer than they otherwise would be."
Exactly right Dean. This makes the rest of us poorer then we otherwise would be.
Whose Side Are You On, A Zero Sum Wealth Game
written by izzatzo, October 26, 2010 7:30
If the economy ever gets back to full employment, their wealth will reduce the resources available to the rest of us.

Well it's about time for this honesty from Mr Whose Your Nanny. Finally the admission of a zero sum tyrant emerges from the masquerade that zero sum does not apply when there's massive unemployment because there's no scarcity, so don't worry about deficits and inflation and spend like there's no tomorrow.

But now we know. It's all about TARP revenge. It's OK to have a welfare state for freeloading liberals, but not for bankers.

Give a banker a fish and it's a handout, but give a banker a fishing pole to earn and keep wealth to pay for the pole, and Baker wants to confiscate it with a zero sum socialist full employment plan, so there's more wealth for others after reaching full employment.

Whose side are you on Mr Nanny. You can't have it both ways. That's what zero sum means. No free lunch. Read Econ 101.

Stupid liberals.
hey izzatzo
written by wunsacon, October 26, 2010 7:48
Yahoo comment boards are calling your name. You better get over there.
written by skeptonomist, October 26, 2010 8:05
The real cost will come in the next financial crash. After 1929 there were major regulatory changes and no big melt-downs until these regulations were repealed or subverted. Many of the big players who had been instrumental in building up the bubble of 1929 lost their shirts. This time little has changed and there is nothing to prevent another bubble from building at any time.
written by liberal, October 26, 2010 8:13
wunsacon---izzatzo is known on this comment board as a satirist.
written by Eleanor, October 26, 2010 8:23
I keep wondering about izzatzo. It is satire, isn't it? Is it?
written by Jackrabbit, October 26, 2010 8:31
Interesting and insightful analysis. Thank you.
written by number2son, October 26, 2010 8:53
Well, a parasite is a parasite. I'm sure even ticks have political differences.
FICA Tax cut
written by floccina, October 26, 2010 11:21
Yes, they should have announced a FICA tax cut instead. People would have had more money to pay their loans but the worst banks would have still been in trouble as they should have been. The worst borrowers would still have lost their assets but it is more fair. Other than that you could have just sent a check to every American. These would have helped not just the fools (at citigroup) but the prudent also.

But politics is politics and politicians like to hide things.
written by diesel, October 26, 2010 11:25
Legally sanctioned counterfeiting. An effective analogy.

But if we were to have allowed the bankers to fail, who would serve as a role model for the "greed is good" and "More than anything else,I want to see the United States remain a country where someone can get rich. ..."*, Republican base?

*As spoken by "the newly elected Ronald Reagan".
written by G, October 26, 2010 1:35
"If the market had been allowed to work its magic, the shareholders of these banks would have lost all their holdings..."

"Because the CEOs at Goldman, Citi and the rest have their hundreds of millions in wealth, as do their shareholders"

No, they were not wiped out. But the shareholders at Citigroup were decimated, from $50 down to $3-$4 as part of the 90% dilution by the government as part of TARP. Much of the popular press would suggest that the shareholders were unaffected.

Goldman, on the other hand, has recovered. As has JP Morgan.

The real challenge is on the creditor side. None of the bondholders of any of the large banks took losses.
written by soloduff, October 26, 2010 3:14
OK, I'll bite: Why does Dean Baker disapprove of the hypothetical private printing of money (his "counterfeiting" conferred upon big finance)--on the grounds that if the economy ever recovers to full potential, the rest of us will have relatively less--while (as a Keynesian) approving of the very non-hypothetical governmental printing of money? Is he claiming that the government can be relied upon to print money more equitably? (Can you say, "military-industrial complex," or, "wars"?) According to his theory, would not "growth" be served whoever prints the money, as long as it is spent, i.e., translates into "effective demand"?
written by liberal, October 26, 2010 4:37
G. wrote,
The real challenge is on the creditor side. None of the bondholders of any of the large banks took losses.

written by tinbox, October 26, 2010 5:59
Mr Baker,
I respect your work on "Getting Prices Right" and would like to know who you think is experiencing what level of inflation. Krugman's condescending lectures, like "Core Logic," rely on sticky prices set in non-market situations that seem to reflect expected inflation more than real inflation.

For the 50% of Americans at or below median income levels, at what rate do you think the cost of living is increasing ? How will next week's new venture into QE2 affect that rate?
Robin Antihood — From the poor to the rich
written by Hugh Sansom, October 27, 2010 5:45
Dean Baker nails the real, unstated effect of the Bush-Obama financial rescue from 2008 to 2009. The financial system was indeed helped, at extraordinary cost to us in a myriad ways almost entirely unmentioned in mainstream media. Set aside all the many rights -- formal and informal -- that have been eroded. We have also been made victims of what may be the largest transfer of wealth from the poor and middle classes to the rich in human history.
what about the debt increase?
written by Carter Laftery, October 27, 2010 8:23
If there were no costs to the Government, why did the national debt increase by over 3T in two years? Some part of that is stimulus spending. But a larger part is taking on the "troubled assets", as somebody pointed out.
written by boxer, November 03, 2010 7:02
You can't keep a "good" capitalist down, no matter how much gold they stuff in their pockets before they dive in the deep end of the
financial cess pool.

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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.