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.
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