Be Careful When Touting Bailout Profits

May 19th, 2014 at 8:25 am

A quick note on a common calculation that is less bullish than it sounds.  Here’s an example from a piece by Robert Samuelson this morning reviewing Tim Geithner’s new book:

…the government’s financial rescues made money. Most banks repaid with interest the amounts they received; many other subsidies have been recovered (or will be) with interest. Through 2013, these programs were projected to be $166 billion in the black, Geithner says.

It is a very good thing that beneficiaries of the bank bailouts more than repaid the government for the resources they received from the TARP, and in other places, I’ve pointed out that by reasonable metrics, the TARP worked, and did so for a lot less than most people think.

But these government profit calculations are misguided because they fail to net out the damage done by the crisis the banks helped cause.

More than two years ago, I wrote:

Saying that TARP worked — and that it might even ultimately turn a profit for the taxpayer — is not to say that stabilizing the financial system prevented the pain of the Great Recession. Millions of Americans continue to pay the price in long-term unemployment. Millions more have lost or will lose homes to foreclosure, and trillions of dollars in housing wealth have evaporated. The U.S. gross domestic product remains about $900 billion below its potential level. Unemployment remains stubbornly high.

The government’s financial-market interventions made that pain less deep, but they did not prevent it, and any potential gains from these programs pale next to the damage done by the high-finance-inflated bubble that caused the sharp downturn from which we’re still recovering.

The gap in potential GDP may be closer to $850 billion now.  Otherwise, the critique still holds.

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4 comments in reply to "Be Careful When Touting Bailout Profits"

  1. Zach says:

    Also, they repaid TARP by increasing my fees. I’d prefer to just be taxed.


  2. Larry Signor says:

    Dean Baker would have a field day with Samuelsons column.
    Samuelson writes: “The economy’s recovery, though slow and disappointing, still compares favorably with many precedents. In the Great Depression of the 1930s, employment did not regain its pre-crisis peak for eight years. By contrast, today’s employment is near its pre-recession peak after six years.”

    Nominally he is accurate…if we ignore the LFPR and the opportunity cost of not creating an adequate number of new jobs to be consistent with population growth.

    Samuelson has one more doozy to share with us: “The long boom beginning in 1982 and lasting until 2007…”

    He really did write that. I must have been living in a cave for 25 years.


  3. readerOfTeaLeaves says:

    Ultimately, while it is fine that TARP is said to have ‘worked’ and ‘repaid’ the taxpayers, this avoids another topic that — humans being social critters — has economic impacts: a sense of injustice that the underlying fraud and poor bank processes was never investigated and prosecuted. Whether TARP did work, or whether it didn’t, the fact that there were no prosecutions and bankers walked away with huge paychecks has had a slow, corrosive effect on public trust and damaged the legitimacy of government.


  4. Scott Monje says:

    Does that $166 billion profit constitute a drain on the economy? Or would it just have been sitting around in a bank anyhow?


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