According to the U.S. Department of the Treasury, the U.S. response to the financial crisis of taxpayer bailouts of the banks “were effective in preventing the collapse of the financial system”, “were able to limit the broader economic and financial damage”; the “economy is stronger today” and “the damage would have been far worse, and the costs far higher, without the government’s forceful response.”
Not a single fact is presented to bolster these bold assertions. Would the sky truly have fallen if these bailouts had not occurred? We are simply supposed to accept as a matter of faith that the government saved the economy by bailing out the banks with taxpayers’ money. “Trust us! We’re the government!”
There is an alternative argument, that the government’s response has, by preventing a necessary market correction and liquidation of the malinvestment, only prolonged the pain, turning what would have been a painful but relatively brief recession in to the “Great Recession” (compare, for example, the severe but brief ’20-’21 depression, where the government did not interfere much and the economy was back on its feet in a year, with the Great Depression, where the government intervened massively).
Furthermore, by rewarding the banks for their irresponsible excessive risk-taking with a no-strings-attached taxpayer bailout, the government has not only done nothing to prevent a recurrence, but incentivized such behavior in such a way that when the market correction does finally come, it will be all that much worse, just as the 2008 crisis following the collapse of the Fed-created housing bubble was much worse than that following the collapse of the dot-com bubble.
Moreover, the Treasury claims that, the taxpayers are “likely” to get a “positive financial return … in terms of direct fiscal cost”. Looking at some of the charts they provide, some of these projected profits remain a decade away according to estimates that include other rosy assumptions about recovery and economic growth.
Gretchen Morgenson comments in the New York Times (hey, I don’t always cite the NYT only to rip on them):
It’s enough to make you want to break out the Champagne.
But the rosy scenario, delightful though it may be, is incomplete. And the first clue is that the return estimated by the Treasury Department is based on “the direct fiscal cost.” The indirect costs of the rescue efforts, including subsidies provided to the recipients by taxpayers, loom large. But they are unmeasured in this analysis.
This point was made in Washington this month by a group of respected economists, who also contend that a large portion of the payments that the Treasury said will accrue to taxpayers should not be included.
Edward J. Kane, a professor of finance at Boston College and an authority on analyzing subsidies, was one of those economists. In an interview last week, he called the Treasury’s analysis deficient.
First, Mr. Kane objected to the Treasury’s inclusion of $179 billion in interest income that it expects the Federal Reserve to generate on investments through 2015. These include Treasury securities and other assets bought by the Fed under various rescue programs.
Including such income is improper, Mr. Kane said, because — from the taxpayers’ point of view — the Fed’s balance sheet and income statements should be consolidated with those of the Treasury. When the Fed receives income on its government securities, for example, that money comes from the Treasury. Characterizing that as a gain for the taxpayer is a reach, he said.
AN even larger problem with the Treasury analysis, Mr. Kane said, is its failure to calculate the value of the subsidy that taxpayers provided to rescue recipients. “You would not pass Economics 101,” he said, “if you didn’t understand the opportunity costs involved in providing the subsidy.”
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.
When the subject of bailout benefits comes up, policy makers usually characterize them in broad and nebulous terms. The rescues avoided another Great Depression, as Mr. Massad said, or staved off Armageddon.
This is insufficient, in Mr. Calomiris’s view. “It’s not good enough to say it would have been the end of the world,” he said. “If you do a cost-benefit analysis you have to take into account all relative alternatives.”
Better to estimate the damage that would have been done to the economy as a whole if the rescues hadn’t taken place and then argue that the amount spent was worthwhile.
“If you think you avoided a major credit contraction and you have some model of what the disruption would have been to gross domestic product,” Mr. Calomiris added, “that might tell you the benefits were far in excess of the costs.”
Recognizing all the costs associated with bailouts and formulating an estimate of the benefits provided by those costs is something that taxpayers have a right to expect from their government. Being honest about the costs and benefits is the only way we can analyze the response to the crisis and correct any mistakes that were made.
Focusing on whether the programs made money misses the point, Mr. Kane said. “The real issue,” he said, “is how well the government used the money and what are the lessons.”
We’re still waiting for that.