Friday, October 1, 2010

TARP: A Failure to Communicate

The Times reports that the estimated cost of TARP (a.k.a. "the bank bailout") has been revised downwards yet again:
Treasury reckons that taxpayers will lose less than $50 billion at worst, but at best could break even or even make money. Its best-case assumptions, however, assume that A.I.G. and the auto companies will remain profitable and that Treasury will get a good price as it sells its corporate shares in coming years. 
The Treasury has come out ahead on the money invested in the banking system - for example, it is making a profit on its investment in Citigroup.  The losses, if there are any, will come from the investments in the auto industry, and in AIG (which has announced a plan for unwinding its government ties).

The reality is certainly far different from the widespread perception that the government simply gave away $700 billion to Wall Street.  The failure to get the facts through people's thick skulls out appears to have had significant political consequences - would there be a "tea party" without this persistent misconception?  The Times story provides an example of the political consequences of this ignorance:
Among those who voted for the program in 2008, several Republicans have lost nominating contests for re-election or for another office, and others are on the defensive in fall races. Senator Robert F. Bennett of Utah was “Bailout Bob” to Republicans who refused to re-nominate him for a fourth term.
“For those who were screaming at me — and screaming was the operative word — ‘You’ve just saddled our children and grandchildren with $700 billion,’ I said, ‘No, I haven’t,” Mr. Bennett said in an interview.
“My career is over,” he added. “But I do hope that we can get the word out that TARP, number one, did save the world from a financial meltdown and, number two, did so in a manner that, I believe, won’t cost the taxpayer anything. And even if it did not all get paid back, it was still the thing to do.”
However, it should be noted that, while the financial cost of TARP will be much less than people think, the taxpayer is on the hook for some other costs because of the takeover of Fannie Mae and Freddie Mae (an indirect bank bailout).  The real cost, Simon Johnson argues, is that TARP (and the Dodd-Frank financial regulation bill) failed to create an incentive structure that will prevent financial crises.  He writes:
The first draft of its history, looking back over the past two years, may be this: TARP was an essential piece of a necessary evil – that is, it saved the American financial system from collapse — but it was implemented in a way that was excessively favorable to the very bankers who had presided over the collapse. And this sets up exactly the wrong incentives as we head into the next credit cycle.
He may be right.  But, for now, we are getting most of the money back, and our politics would be significantly different if people understood that much.


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Hal (GT) said...

It's all a shell game I think. The Treasury is adept at tweaking numbers. Frankly, I don't buy it and it looks like a pre-election gambit. Given what gold continues to trade at, I think that others feel the same way when it comes to confidence in our FED.

Bill C said...

Hal, thanks for your comment. Its interesting that the gold market suggests people are worried the US might monetize its debt and debauch the currency, but, at the same time, long-term treasury yields remain low and inflation expectations based on TIPS spreads are also low.