Bank Bailouts No Bargain for US Taxpayer
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How much will the bank bailout cost US taxpayers ???
The answers have as much to do with politics as economics – which, of course, is no surprise to readers of this site … 😉 …
How much will the bank bailout cost US taxpayers ???
The answers have as much to do with politics as economics – which, of course, is no surprise to readers of this site … 😉 …
How much will the bank bailout cost US taxpayers ???
The answers have as much to do with politics as economics – which, of course, is no surprise to readers of this site … 😉 …
How much will the bank bailout cost US taxpayers ???
The answers have as much to do with politics as economics – which, of course, is no surprise to readers of this site … 😉 …
Anonymous Treasury officials have claimed in recent days their Armageddon-avoidance will wind up costing far less than many feared.
One Treasury estimate, leaked to The Wall Street Journal, put a price tag of $89 billion on the financial bailout.
That’s far below the $250 billion the Congressional Budget Office estimated last year or other analyses that put the all-in number at $1 trillion or more. [br]
It is understandable, of course, that Treasury might want to transmit good news about bailouts just as Americans were rushing to meet the I.R.S.’s tax deadline.
And given that Treasury is run by Timothy F. Geithner, the man who doled out bailout billions as president of the Federal Reserve Bank of New York,
his current minions certainly have an interest in peddling the view that the price of these rescues has become less onerous.
But before we break out the Champagne, let’s look at the costs this estimate included — as well as those it left out, says the ever-shrewd Gretchen Morgenson in this column from the New York Times.
What the $89 billion included were:
costs associated with stabilizing Fannie Mae and Freddie Mac, the mortgage finance giants;
loan guarantees by the Federal Housing Administration;
and liquidity programs offered by the Federal Reserve, such as those authorizing the purchase of mortgage-backed securities from financial institutions.
It also included the Troubled Asset Relief Program — which, nameless Treasury officials contended, may someday generate a profit. [br]
But if the Treasury wants to provide a full assessment of the costs of this financial debacle, it will have to add some more beads to its abacus …
A major factor missing from Treasury’s math is the vast transfer of wealth to banks from investors resulting from the Fed’s near-zero interest-rate policy.
This number is not easy to calculate, but it is enormous.
The Fed’s rock-bottom interest-rate policy bestows huge benefits on banks because it allows them to earn fat profits on the spread between what they pay for their deposits and what they reap on their loans.
These margins are especially rich on credit cards, given their current average rate of 14 percent and up.
The losers in this equation are savers and investors, especially people on fixed incomes …
Then there are the losses suffered by the Federal Deposit Insurance Corporation when it has to take over faltering institutions.
The estimated cost to its insurance fund is $6.65 billion for the 43 banks that have failed this year. The fund is financed by bank fees.
Treasury’s recent figures also don’t reflect hits that may result from loss-sharing arrangements the F.D.I.C. set up with healthy banks to persuade them to take on the assets of failing ones.
How much the government might have to swallow as part of that program is unknowable now,
but Christopher Whalen, editor of the Institutional Risk Analyst, said he expects such losses to hit $400 billion when all is said and done.
There are also costly consequences of our government’s relatively easygoing approach to bank assistance, a practice Mr. Whalen calls “extend and pretend.”
“The refusal of the Washington political class to address the issue of bank insolvency quickly via restructuring and recapitalization has extended the economic recovery process by years,” he said.
“Lending will continue to shrink and real economic activity is suffering. The cost of ‘extend and pretend’ goes into the trillions of dollars of lost economic activity.”
By allowing the banks to keep bad loans valued on their books at unrealistic levels, the government has prolonged the agony of this downturn.
Mr. Whalen suggested that the government should have made the banks write down loans to realistic levels a long time ago, while letting them keep the TARP money as a financial cushion.
Instead, the banks were encouraged to pay back TARP
and put off the day of reckoning when it came to assessing the real-world value of the toxic assets lurking on their books.
Gee, does that sound anything like how the Japanese government handled the meltdown of the Tokyo real estate market in 1989 ???
As we’ve said so often, WELCOME TO THE LOST DECADES !!!
