The release this week of a memoir, Stress Test, by President Obama's first-term treasury secretary, Timothy Geithner, is providing an opportunity to re-argue the merits of the extraordinary measures that the Bush and Obama administrations and the Federal Reserve took five years ago to combat the financial crisis.
A cover story in The New York Times magazine offers a preview of one of Geithner's main arguments in defense of the troubled asset relief program. "We are going to earn, all in, a couple hundred billion dollars," the Times quotes Geithner as telling a Harvard audience.
The Times article explicates the point. "The evidence is persuasive," it reports. "ProPublica, the nonprofit investigative organization, which keeps a tally of the bailout, puts the current profit at $32 billion. The White House Office of Management and Budget estimates that Fannie and Freddie will turn a profit of $179 billion over the next decade….A larger point is indisputable: While the returns were never the goal—saving the system was—they are indeed evidence of its success."
There's nothing like a New York Times claim that a point is "indisputable" to tempt me into disputing it, thereby disproving the claim. But it's worth remembering here that this isn't just typical Times nonsense—it's a bipartisan talking point that one hears about TARP from its defenders in both the George W. Bush administration and the Obama administration. Here are four reasons it is a flawed argument.
The return is not impressive. Geithner and the Times tend to talk about the profits—"$32 billion," "a couple hundred billion dollars"—without mentioning the amount spent or the amount of time it was invested. The same ProPublica scorecard that shows the profit—$30.4 billion, not the $32 billion the Times claims—says $611.2 billion has gone out the door. A $30 billion return on $611 billion is a return of about 5 percent total over five years. That's pathetic during a five-year period in which the total U.S. stock market has been returning about 19.5 percent a year, or a compounded total return of about 150 percent. Even if you use the "$179 billion" or "couple hundred billion," figure, if it is the return over 15 years on a $611 billion outlay, it's not exactly a spectacular success.
It ignores what the money could have done in private hands. If you divide that $611 billion among the 140 million or so individual income tax filers who were taxed or indebted to pay for the outlay, it works out to about $4,360 for each tax filer. Who knows what that money could have produced if it were spent, saved, or invested by individuals rather than by Geithner, Henry Paulson, or Ben Bernanke?
The profits are a sign the program was unnecessary. If the government made money by investing in "troubled" assets, then so could have private investors motivated by a desire for profit. The private investors might have even been better at it.
The government's profits were taken away by force from other people who had a better claim to them. The government's returns were made in part by seizing control of companies like AIG, Fannie Mae, and Freddie Mac from their shareholders, or, in the case of Chrysler, bondholders. In those cases the returns rightfully belong to the shareholders and bondholders whose assets were taken away. Geithner's boasting about it is unseemly. His talk about profits is like a Cub Scout who grabs another kid's pinewood derby car, then claims credit for how fast it goes in the race.
Another way of thinking about it is that some of the profits came out of the pockets of companies that would have benefited had their competitors gone out of business, or companies that would have started to fill gaps left by companies that closed. For example, the government's decision to save General Motors hasn't created any "profits" yet for the government, but every car sale that GM racks up means that someone isn't buying a Tesla or a Toyota.
Debating Tarp is difficult because we don't know what would have happened otherwise. Maybe without the extraordinary measures the economy would have gotten even worse and recovered even more slowly. Or maybe without the extraordinary measures the market would have gotten better on its own and recovered more rapidly. But Geithner and The New York Times notwithstanding, the government's "profits" on the deal aren't a good argument in favor of it, and they certainly aren't "persuasive" or "indisputable" evidence.