The much-maligned TARP program will cost taxpayers only $25 billion according to the latest estimates from the Congressional Budget Office. That’s substantially less than the $66 billion CBO estimated back in August or the $113 billion that the Office of Management and Budget estimated in October.
The good news, budget-wise, is that the government is on track to make about $22 billion on its assistance to banks.
However, CBO estimates that TARP’s other activities will cost $47 billion. This reflects aid to AIG ($14 billion), the auto industry ($19 billion), mortgage programs ($12), and a few smaller programs ($2 billion).
So does this accounting actually take into account costs such as the $45 billion in tax breaks given to GM in November? Does it take into account other subsidies given to GM such as the cash for clunkers program or the guarantees given to pension funds? And those are just the additional uncounted costs borne for GM.
http://online.wsj.com/article/SB10001424052748704462704575590642149103202.html
I don’t think we can measure the cost of loan guarantees and capital injections by tallying up gains and losses ex post. A guarantee is costly even if it is never exercised. So it’s the value of the insurance provided (i.e., what an actuarially fair premium would have been) that is the true cost.
Moreover, there are costs that we won’t be able to measure for many years–possibly even decades–by the kind of moral hazard created by the bailouts. This can be mitigated by enlightened regulation of financial institutions, and the government is trying to do that, but I don’t know how successful the regulation will be. (And, of course, if regulators overreach, in part because of a perceived moral hazard problem created by implicit guarantees, that could also be costly.)
To be clear, I thought TARP was far preferable to allowing the financial sector to crash and burn, but I think it was a very costly intervention, and one whose full costs won’t be known for some time.
Hi Len –
Yes, ex post evaluation of loan guarantees is a tricky business until you have a very, very long time line. Indeed, that’s what brought down the AIG’s of the world who thought they were making money writing the equivalent of loan guarantees.
In this case, much of the action is in equity and equity-like investments. The good news, methodologically, is that CBO uses risk-adjusted returns, so the gains on the bank investments, for example, mean not merely that the government did better than the cost of borrowing, but that it beat an estimate of the risky return.
As you say, programs like TARP raise significant ex-post moral hazard issues. But conditional on the government intervening (a big condition to be sure), I am a big fan of structures in which the taxpayer gets warrants, equity, or similar exposure to the upside. Much better than pure subsidy.
The claim of a $25 billion loss is simply ludicrous, and I guess that I was hoping that Don would provide some guidance on this rather than giving it any credence. One might not be able to put a precise value on many of the subsidies, but some of them are easy to value. The $45 billion in reduced taxes isn’t that hard. One just has to figure out roughly the time period over which it will be used and also the proper discount rate. The insurance cost for the pension plans should also be doable to get a rough estimate, though I agree that is somewhat more difficult. I am not even sure that the cash for clunkers program would be that hard, but I agree that it is more difficult. Still I would think that just for GM these additional costs might well over $60 billion. It is simply irresponsible accounting by the CBO to completely ignore these and other subsidies.
Hi John –
I give lots of credence to CBO’s estimate for the costs of the Troubled Asset Relief Program, TARP. But, as you note, people should not draw inferences from this about the overall costs of the financial bailouts, the auto bailouts, or the broader government response to the financial and economic crises. The government pulled on lots of policy levers during the past three years, with varying degrees of success.
On an economic-bang-per-buck basis, I think the financial part of TARP will go into the record books as one of the best of the government moves.
Dear Don:
Thanks for the response. I guess my concern is that the cost estimates for TARP cannot be separated from the overall cost of the financial bailouts. For example, the $45 billion in reduced taxes in early November must have had a real impact on how much money people were willing to pay for the new stock. That stock price intern impacted how much money the government says that it got back on its TARP investment. Suppose that the government had reduced GM’s tax bill by $100 billion and the stock price then rose above the $44 the government had originally paid for GM stock, would you want the CBO to then claim that the government had made a profit on the TARP funds? I don’t see how one can evaluate how good of a move TARP was unless you take into account all these other financial moves taken by the government.
I hope that you are doing well.
Best,
John
It looks to me like Fannie and Freddy will cost us 200-300 billion (which is non tarp tarp, in that it goes back to bank balance sheets, but doesn’t show up as bailouts of the banks). And probably a point of gdp for a decade. And the states have a 3 trillion hole, that is also not in ‘tarp’. The pejorative ‘tarp’ should include Fannie, Freddy, and the state bail outs, and then its neither pretty, nor even in the second inning.
The tarp was necessary to avoid a full fledged collapse, but propping up housing is just killing us in terms of finding our new normal and getting back to work, and its all part of tarp, defined as ‘not letting a good crisis go to waste’
I guess finding useful, reliable infmoration on the internet isn’t hopeless after all.
Dear Donald:
It looks like the TARP estimates have not only looked over subsidies such as the $45 billion gift from the IRS to GM and other subsidies in the stimulus, but, according to a new Fox Business report, not it turns out that the Federal Financing Bank gave tens of billions of dollars in extremely low interest loans to some of those getting TARP money as well as to companies that the TARP recipients had invested money in. $40 billion or so at near zero interest when the interest rate possibly should have been 10 percent (assuming that some of these really risky investments would have even gotten the money) is a pretty big present value subsidy. It is also becoming more clear that other stimulus money was given to these TARP recipients and to those that they had invested in. At what point would these CBO estimates be considered questionable for leaving out these huge subsidies?
Best,
John
Dear Donald:
I guess that there is the related question of whether we will find still other subsidies that haven’t yet been noted. Also what is the opportunity cost of giving these business all this money?