Sunday, April 26, 2009

Contrarian opinion – the bailout is working, and it’s relatively cheap

My iPhone Wall Street Journal app means I read the WSJ for free.

The “free” is important. The WSJ editorial pages are blithering madness assaulting civilization and reason. If I were to pay for the WSJ’s excellent news pages, I’d be funding WSJ editorial attacks on my children’s future. If I’m not paying for the editorials though, I can get the excellent journalism guilt-free.

So I came across a moderately contrarian opinion on the usual descriptions of the Geithner bailout (emphases mine):

Why the Wall Street Bailout is Working - David Weidner -

Anyone who takes tea with friends will tell you: The parties are painless. It's the gossip that hurts.

In the same way, today's antitax, antispending movements aren't the problem, it's the dangerous misconceptions they spread about the government response to the financial crisis.

Their argument -- that huge tax hikes are coming or have been implemented to pay off bailouts for banking fat cats -- betrays a lack of understanding of the government's approach to solving the financial crisis. When protesters or critics complain about the $10 trillion-plus spent on the Wall Street bailout, you can understand how their estimates of the number of protesters in the streets last week were slightly, well, inflated.

The truth: No one's paying new taxes directly related to the bailout. And most of the government rescue packages offered to the banks have gone untapped or are being repaid…

… Make no mistake, U.S. taxpayers are on the hook for a lot of money. The government has spent or expects to spend about $2.4 trillion in the next few months to keep the financial gears moving. It's a stunning amount of money made worse by rage-inducing missteps such as the bonus debacle at American International Group Inc. and the initial lack of direction for the Troubled Asset Relief Program…

… If the economy does recover within a year, we'll have spent a lot to rescue the financial system, but nowhere close to the 14-digit figure flogged by tea party protesters.

In fact, there's no way the government will spend that much, because many of the 26 bailout programs aren't being used much, according to Federal Reserve and Treasury Department statistics. For instance:

Banks have tapped the FDIC's Temporary Liquidity Guarantee Program for $297 billion so far. That's about 20% of the total $1.5 trillion allocated. This is the biggest of the government programs, and banks pay 0.5% to 1% interest for the right to borrow the money depending on how long they keep it.
During its first month, the Term Asset-Backed Securities Loan Facility, or TALF, has only financed $4.7 billion in consumer debt, far below the $1 trillion allocated. In addition, participation is declining with each new funding cycle.

The Money Market Guarantee Program, aimed at insuring money-market funds against losses, hasn't spent a dime. It covers up to $3.8 trillion in money-market debt. This program is actually making a small profit, because participating funds are required to pay a fee.

Other than the stimulus bill, the program with the biggest outlay so far is the Troubled Asset Relief Program, or TARP. More than $570 billion has been committed, but less than $400 billion has actually left the Treasury Department. Like most of these programs, it's unclear how much of this money will be repaid, but most banks say they're either ready or capable of giving it back. If not, they have to pay a 5% annual dividend to the government. In just the first three months of this year, the government has collected $2.52 billion in TARP interest.

You get the idea. Most of these programs were designed as backstops and as proof that the government stands behind the country's private financial system. The government is extending its own credit line to banks until the private sector can repair its own.

Recovery, when and if it occurs, will render many of these programs obsolete. The actual cost to taxpayers will be either negligible or drastically less than the most dire forecasts suggest.

Of course, taxpayers stand to lose more if the economy worsens and the financial system losses deepen further. It's not hard to imagine a scenario in which high unemployment leads to bigger loan defaults, setting off a domino effect of lower home prices and bank failures. Americans have $2 trillion in credit-card debt, and banks are holding that, too.

If that scenario comes to pass, financial companies could tap every dollar of the government's massive credit line.

The International Monetary Fund on Monday projected banks world-wide will need an additional $875 billion in capital by next year to get reserves to precrisis levels. That means most banks will need to raise cash through the public and private markets -- or, failing that, from the government.

But potential losses aren't the same as real ones.

Our national debt already stands at $11 trillion. Most of that debt was run up in the last eight years, when government spending outpaced declining tax revenues. The Iraq war is close to costing the nation $1 trillion. Hurricane Katrina cost us about $110 billion.

We ran up a huge tab for our kids well before the bailout, but it's unlikely that such an inconvenient fact will be the talk of the next tea party.

This is in line with the DeLong line, and somewhat opposed to Krugman (though his concern is not so much that money is being tossed out, as that it is not being spent where it should be).

I’ve seen comparison made elsewhere to the vastly smaller S&L bailout. It cost much more than was imagined early on, but much less than feared. My hope, prayer and hunch is that we’re in the same ballpark.

The vast deficits our children will inherit will not be the result of government bailouts, they will instead be driven by bad policies (Bush/GOP) and demographics (aging population).

Incidentally, the solution to the American demographic problem is just north of Minnesota. Canada has pioneered the exchange of Canadian citizenship privileges for the economic output of the world’s top producers. The US could do the same; we just need Obama to keep making America a more appealing place to live. Health care reform will help.

1 comment:

Unknown said...

I don't see how you think its fair to say the Bush administration ran up 11 trillion dollars in debt. The government wasn't responsible for most of the debt. The private consumer is. Credit card debt as you stated is at 2 trillion but the Bush administration only contributed 450 billion to a deficit. Your doing the same things the right does and I don't think that's very good reporting. It isn't the governments fault that the average American consumer borrows their way into a hole.