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The government's pretty-good investment

Bloomberg reports that taxpayers have made $25 billion off the $309 billion they loaned the banks and AIG to keep them afloat:

The U.S. government’s bailout of financial firms through the Troubled Asset Relief Program provided taxpayers with higher returns than they could have made buying 30-year Treasury bonds -- enough money to fund the Securities and Exchange Commission for the next two decades.

The government has earned $25.2 billion on its investment of $309 billion in banks and insurance companies, an 8.2 percent return over two years, according to data compiled by Bloomberg. That beat U.S. Treasuries, high-yield savings accounts, money- market funds and certificates of deposit. Investing in the stock market or gold would have paid off better.

And that doesn't even count the benefits of avoiding the wholesale collapse of the financial system. TARP remains one of the most unjustly maligned policies in recent American history. The Democrats and Republicans who voted for the policy saved the economy and will probably, when all is said and done, have made the taxpayers some money, but it's a vote that many of them will lose their jobs over.

By Ezra Klein  | October 20, 2010; 10:31 AM ET
Categories:  Financial Regulation  
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I don't think that because TARP may have made some money or been cost-neutral in a sense that its fair to say its unjustly maligned. This is like people who make judgments on war based on whether or not we had victory or not (ie the Gulf War was right because we did well, the invasion of Iraq was wrong because we didn't do well)

There are alternative takes on TARP that acknowledge taxpayers may have made money, but still either (a) disagree with how it was handled or (b) disagree with it altogether.

In the case of (a), I am sure you are familiar with Elizabeth Warren's oversight hearings on TARP. Why was it necessary to pay Goldman Sachs 100 cents to the dollar on money owed to it by AIG? Regardless of whether or not this "cost" the taxpayer anything, it seems justified to disagree with this as a policy. One might also argue it would have been more just to seize the banks FDIC style, wiping out shareholders and clearing out executives; rather than reward them for their crooked behavior.

In the case of (b), on whether or not we should've had TARP at all, Dean Baker provides some argument that we may not have had a doomsday if we allowed the banks to fail and gives some alternative scenarios. (Links below).

The point is, we ought not to judge the merits of a policy on the simple premise of whether or not it achieves its goals. I imagine if the Iraq War were the cakewalk it was advertised, people would be denouncing pre-invasion opponents as unjustly maligning a successful policy (as in fact they did in the initial months after the war.) Instead because it did not do well, many pre-invasion proponents now announce their "regret" at a policy which should have been judged on its merits (known beforehand) not the outcome. Such as it is with TARP; there were alternatives, it was not the only option, and simply because it didn't technically cost the taxpayers money doesn't mean it was the right decision. For that matter I am not arguing one way or another myself, only questioning your criteria.

Dean Baker articles on TARP:

Posted by: kevinamaley | October 20, 2010 11:08 AM | Report abuse

Ezra, stop trying to harsh the TeaGOP Party's narrative with facts.

Posted by: vintagejulie | October 20, 2010 11:09 AM | Report abuse

The article is correct, TARP was a good thing. But whether the government MADE money or not, is like looking at a miniature house on the grass, photographed as if it were the real thing. There are so many far greater implications of it in terms of currency debasement, government borrowing, collateral securities that the government still holds, etc. This was a life saving prcedure that has long term health implications for the patient. You're very glad to be alive, but the story is more complicated than today's dollars and sense.

Posted by: 54465446 | October 20, 2010 12:29 PM | Report abuse

Rumors of the success of TARP are greatly exaggerated. Bloomberg also notes that "about two-thirds of the funds have been paid back". Which means that one third, or $100 billion has not been paid back. Subtract the $25 billion that has been earned, and we are still $75 billion in the hole.

Posted by: bgmma50 | October 20, 2010 1:08 PM | Report abuse

Ezra, you DO realize that the action of the NY Fed last night completely undermines your argument here don't you? The Fed is suing Bank of America to get them to take back mortgage related securities. Why would the Fed be involved you ask? Well, as CNBC points out:

"Instead, the New York Fed is acting as a private buyer of mortgage-backed securities. Through its Maiden Lane funds, the NY Fed has purchased billions in mortgage-backed securities as part of the bailouts of Bear Stearns and AIG."

This is why no scoreboard can accurately portray the result of TARP at this time, as an investment. It DID save the system, but nobody knows the numbers.

Posted by: 54465446 | October 20, 2010 2:19 PM | Report abuse


Baker is right about one thing, there should have been a plan inplace already for dealing with this. He is wrong about most other things.

Baker wrote:

"Had it not been for the bailout, most of the major center banks would have been wiped out. This would have destroyed the fortunes of their shareholders, many of their creditors, and their top executives. This would have been a massive redistribution to the rest of society -- their loss is our gain.

It is important to remember that the economy would be no less productive following the demise of these Wall Street giants. The only economic fact that would have been different is that the Wall Street crew would have lost claims to hundreds of billions of dollars of the economy's output each year and trillions of dollars of wealth. That money would instead be available for the rest of society. The fact that they have lost the claim to wealth from their stock and bond holdings makes all the rest of us richer once the economy is again operating near normal levels of output."

This is a magical fantasy akin to alchemy or flat out witchcraft. Exactly HOW would that money have been made available to the rest of society? Could anyone really make the case that the ecoonmy would have been "no less productive" after the collapse? You just wrote that the collapse of the banks would have destroyed the fortunes of the banks, their shareholder and many of their creditors and yet also say that the economy would have been "no less productive"?

I didn't know anything about Baker so I looked him up. I'm ok that he is left leaning as an economist, after all the world needs balance. BUT, once again, no real world experience whatsoever, all colleges and his own policy institute. His own words as portrayed above show him to be an unserious person/bombthrower.

He's fun to read, but for God's sake don't ever follow his economic advice!

Posted by: 54465446 | October 20, 2010 2:37 PM | Report abuse

Ezra, I think Democrats, and in a lesser sense you, are getting this whole thing wrong.

TARP worked. Good for us. I opposed and still do. But it worked. It just so happens to be the only successful Bush policy. Certainly Iraq, Afghanistan, NCLB, Medicare Part D, Patriot Act are nothing short of cosmic failures. So why not give Bush credit for this one????

His only successful policy is a socialist leaning, Big Government, financial bailout of America. We should be thankful he had the courage to lead when TARP was very unpopular. He obviously did the right thing. The DNC should issue press releases praising Bush for the courage to pass TARP and save America.

Why? Because it puts the GOP on the winning end of socialist policy. In other words, it will make people realize TARP came from the GOP and not the Democrats and despite being the exact opposite of all public policy the GOP claims to stand for, they did it and it worked. Make them own it!

George Bush instituted TARP. He did it. It worked. And it's the exact opposite legacy or track record the GOP wants to defend.

Posted by: Chris-TheFold | October 20, 2010 2:52 PM | Report abuse

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