Calculating the Cost of Bailouts
by Linda Beale
Calculating the Cost of Bailouts
A recent New York Times includes a piece on the Treasury’s study of the various bailouts or “rescues” of distressed financial and other institutions. Gretchen Morgenson, Seeing Bailouts Through Rose-Colored Glasses, New York Times (May 19, 2012).
The Treasury study, The Financial Crisis Response–in charts (April 13, 2012), is positive about the way that government handled the bailouts.
Collectively, these programs –carried out by both a Republican and a Democratic administration–were effective in preventing the collapse of the financial system, in restarting economic growth, and in restoring access to credit and capital. They were well-designed and carefully managed. Because of this, we were able to limit the broader economic and financial damage. Although this crisis was caused by a shock larger than that which caused the Great Depression, we were able to put out the financial fires at much lower cost and with much less overall economic damage than occurred during a broad mix of financial crises over the last few decades.
Reading that, one might conclude that everybody now is sitting fairly pretty, and that it was all done in a very upfront, fair and damage-free way. That ignores the fact that the bank bailouts treated the banksters with kid gloves–letting managers continue to receive their customary overcompensation and allowing banks generally to continue their predatory practices even while the taxpayers were providing them extraordinarily low-cost financing with practically no strings attached. Meanwhile, ordinary Americans–especially those in the lower half of the income distribution–suffered enormously. Congress–at the behest of the banksters–refused to enact mortgage clawback provisions in bankruptcy, the one law that would have done wonders at saving families and neighborhoods from unprecedented deterioration and blight.
To be fair, the report does include a bevy of charts that attempt to show how the crisis played out for the banks, the economy in general, and ordinary Americans (unemployment, depressed home sales market, etc.). But then the Treasury goes on to claim the following:
[T]he latest available estimates indicate the financial stability programs are likely to result in an overall positive financial return for taxpayers in terms of direct fiscal cost. These estimates are based on gains already realized and on a range of different measures of cost and return for the remaining investments outstanding. These estimates do not include the full impact of the crisis on our fiscal position. And they do not include the cost of the tax cuts and the emergency spending programs passed by Congress.
Now, it is good to know that at least the “direct fiscal cost” of the bailouts is likely to be positive. But note the gaping hole between that amount and the overall true cost of the bailouts–the “impact of the crisis on our fiscal position” and “the cost of the tax cuts” and “the emergency spending programs.” Now, at least the emergency spending programs generated economic activity and made real differences for individual people a good number of whom one can assume weren’t in the top 1%.
The tax cuts are a big cost item and one that may well not have had the benefits assumed, except for those that went to the lower and lower-middle income working classes (such as the payroll tax relief). And the impact on our fiscal position is ongoing and still strongly felt, as we struggle to rebalance an economy that already consumed too much from outside and produced too little here at home. So how much comfort can we take from the idea that the direct fiscal cost may be significantly less than some had initially expected it to be?
Here’s where the Times story comes in. Morgenson notes that “As the battles over financial regulation rage in Washington, it’s crucial that American taxpayers understand the costs associated with rescuing behemoth institutions.” We cannot take wise action for or against reduction in size of banks or other issues unless we are dealing with full information about the crisis and its aftermath. That won’t be easy in the politicized environment in which the Obama administration understandably wants to showcase how its efforts have helped the economy and the GOP seens intent on a “my way or the highway” approach to governance that cares more about winning a race than about doing what’s good for the people.
Morgenson reports on an interview with Edward Kane, Boston College finance professor and economist, who thinks that the public needs to see a more thorough cost-benefit analysis of the TARP and other expenditures. Kane calls the analysis “deficient” (one might even say misleading) for counting as gains the interest income the Fed made from holding Treasuries (this is like money passed from mom to dad to put in the allowance jar for the kids–in other words, Treasury interest is paid by the US fisc to the Fed, and the Fed’s profits are paid into the US fisc, so it’s all the same pot). But the bigger deal is a genuine evaluation of the opportunity cost of the subsidy provided to bailout recipients.
The programs provided enormous amounts of money at below-market terms for extended periods, he said. Had those guarantees been priced at their true market value — what a private investor would have charged to lend during those dire days — taxpayers should have received far higher returns. Morgenson, Seeing Bailouts Through Rose-Colored Glasses
Charles Calomaris, a Colombia Business School prof and NBER research associate who worked with Kane on the study, noted the cost-benefit concern.
“We are not saying that the benefits weren’t there,” Mr. Calomiris said. “We’re not saying that it wasn’t worthwhile to create these programs. Maybe it was, maybe it wasn’t. But it requires a fuller analysis of what the benefits were.” Morgenson, Seeing Bailouts Through Rose-Colored Glasses
crossposted with ataxingmatter
I’m a little suspicious of “opportunity costs.”
sort of thing where a lawyer figures out how much it costs him to brush his teeth in the morning in terms of lost billable hours.
“Collectively, these programs –carried out by both a Republican and a Democratic administration–were effective in preventing the collapse of the financial system, in restarting economic growth, and in restoring access to credit and capital.”
Restoring access to credit and capital? You’ve got to be kidding. Nobody has sent me an offer for a new credit card this year. 😉 I don’t see those, You Win When Banks Compete ads, have you? The TBTF banks got bailed out and immediately raised their credit card rates. Have they reduced them yet? Pauson said that the bailout was so banks could start lending again. We’re still waiting. . . .
“Collectively, these programs –carried out by both a Republican and a Democratic administration–were effective in preventing the collapse of the financial system, in restarting economic growth, and in restoring access to credit and capital.”
Restoring access to credit and capital? You’ve got to be kidding. Nobody has sent me an offer for a new credit card this year. 😉 I don’t see those, You Win When Banks Compete ads, have you? The TBTF banks got bailed out and immediately raised their credit card rates. Have they reduced them yet? Pauson said that the bailout was so banks could start lending again. We’re still waiting. . . .
“Collectively, these programs –carried out by both a Republican and a Democratic administration–were effective in preventing the collapse of the financial system, in restarting economic growth, and in restoring access to credit and capital.”
Restoring access to credit and capital? You’ve got to be kidding. Nobody has sent me an offer for a new credit card this year. 😉 I don’t see those, You Win When Banks Compete ads, have you? The TBTF banks got bailed out and immediately raised their credit card rates. Have they reduced them yet? Pauson said that the bailout was so banks could start lending again. We’re still waiting. . . .
“Collectively, these programs –carried out by both a Republican and a Democratic administration–were effective in preventing the collapse of the financial system, in restarting economic growth, and in restoring access to credit and capital.”
Restoring access to credit and capital? You’ve got to be kidding. Nobody has sent me an offer for a new credit card this year. 😉 I don’t see those, You Win When Banks Compete ads, have you? The TBTF banks got bailed out and immediately raised their credit card rates. Have they reduced them yet? Pauson said that the bailout was so banks could start lending again. We’re still waiting. . . .
“Collectively, these programs –carried out by both a Republican and a Democratic administration–were effective in preventing the collapse of the financial system, in restarting economic growth, and in restoring access to credit and capital.”
Restoring access to credit and capital? You’ve got to be kidding. Nobody has sent me an offer for a new credit card this year. 😉 I don’t see those, You Win When Banks Compete ads, have you? The TBTF banks got bailed out and immediately raised their credit card rates. Have they reduced them yet? Pauson said that the bailout was so banks could start lending again. We’re still waiting. . . .
“Collectively, these programs –carried out by both a Republican and a Democratic administration–were effective in preventing the collapse of the financial system, in restarting economic growth, and in restoring access to credit and capital.”
Restoring access to credit and capital? You’ve got to be kidding. Nobody has sent me an offer for a new credit card this year. 😉 I don’t see those, You Win When Banks Compete ads, have you? The TBTF banks got bailed out and immediately raised their credit card rates. Have they reduced them yet? Pauson said that the bailout was so banks could start lending again. We’re still waiting. . . .
Please delete copies. Thanks. 🙂
Please delete copies. Thanks. 🙂
Please delete copies. Thanks. 🙂
Well, we avoided a depression. +
The whole deal was woefully mismanaged. –
Now what?
“the “impact of the crisis on our fiscal position” and “the cost of the tax cuts” and “the emergency spending programs.”
None of these are “costs of the bailouts”. They may be costs of something, but not of the bailouts.
Min,
You must be living right. I get credit card offers all teh time. As does everyone in the family – including my 11 year old son. The son in college gets the most – practically 1 a week. Most want a parent signature! Bwahahaha!
And out ‘spam’ email address, (we put a phoney email in for places that require one, we look at it maybe ones every few weeks) is inundated with credit offers.
And don’t forget the banks and realtors constantly offering to refinance my house or buy/sell it!
If its not to personel, how did you get off the spam circuit??
Islam will change
“The TBTF banks got bailed out and immediately raised their credit card rates.” While both components of this sentence are true, banks raised their credit card rates thanks to the Durbin amendment in Dodd-Frank, which had nothing to do with the bailout. And even if it did, one reason a firm may need a bailout is because it’s not generating sufficient profits to cover its outstanding debt. One way of potentially generating better profits is by trying to raise prices.
“Pauson said that the bailout was so banks could start lending again.” According to the FRB H.8 Data: http://www.federalreserve.gov/datadownload/Choose.aspx?rel=H8
Loans made by Large Domestically Charted Commercial Banks are up 16% since May of 2007 (IIRC, the first subprime scare started in February of 2007), or 3% annually in nominal terms – a bit slower than GDP. The real issue is the collapse of the Shadow Banking system (I assume perceived to be more of a feature than a bug by many readers/commenters here). Deloitte estimates that the Shadow Banking system is about half of its peak in 2008: http://www.deloitte.com/view/en_US/us/press/Press-Releases/4db66afde1397310VgnVCM1000001956f00aRCRD.htm
As for the OP, the government, as the lender of last resort, doesn’t need to extract private market rates for its loan, because the presence of the the government acting as lender of last resort essentially draws a floor under asset prices which provides them a return pathway that’s not available to private investors.
As for “treated the banksters with kid gloves–letting managers continue to receive their customary overcompensation” let’s see, I’m pretty certain that the then C-Suite members of Bank of America, Bear, Lehman, AIG, Countrywide, Washington Mutual, Wells Fargo, Merrill Lynch, and Morgan Stanley, to name a few, are no longer employed by their firms (or successors thereof). The CEO of Citigroup, while still CEO, joined the firm after the die was cast and was still paid $1.00 in 2010 and agreed to $1.00 for 2009, but after he had received $125,000 of base compensation. I think if you were to ask knowledgable JP Morgan shareholders to list the top three reasons they own the shares, the leadership of their CEO would be the most common answer – and again, neither JP Morgan, nor Goldman, wanted TARP and both repaid it as quickly as their regulators let them.
Also – what Mark said below.