Government Spending

Timothy Geithner's Flawed Defense of TARP

Obama's former treasury secretary attempts to rehabilitate his record.

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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.

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  1. A $30 billion return on $611 billion is a return of about 5 percent total over five years.

    Over half of TARP was repaid (plus interest) within one year – not five. Still, Geithner managed this very well. The opportunity for government to fuck things up is always high.

    1. If we’re going to evaluate the performance of the entire portfolio, then I think 5% over 5 years is the number.

      1. Interesting if true… /little::coselll

    2. Considering that TARP started with Bush, then do he and Paulson get credit for the initial year returns?

      Ooo, bet you don’t like that logic…

      1. I felt a great disturbance in the Left, as if millions of progs suddenly cried out in terror and were suddenly silenced.

  2. Who believes this for any instant whatsoever ?
    From the fraudster accounting hacks who lied for decades and stole at will openly bragging about it while granting themselves triple A double plus good rating grades.

    Clearly they “lost” a trillion or two, we just won’t find out for decades, when audit the FED still failing gains a lucky leak on a website error.

    1. TARP had no funding from the Fed. Zero. It was funded by selling US Treasuries.

      The Fed doesn’t need to ask Congress for shit.

      1. Good thing there’s no relationship whatsoever between US Treasury securities and the Federal Reserve!

      2. TARP had no funding from the Fed. Zero. It was funded by selling US Treasuries.

        Mostly, to the Fed.

        1. But not by statute.

          Anyway, I read that linked NYT article. Sorkin is one of the better financial journalists.

          But the comments! Fucking dumbass progressives stuck on the “evil criminal bankster” myth.

          The article got it right – the big banks were mostly “lumbering dumbasses” who soaked up toxic debt voluntarily.

          1. The article got it right – the big banks were mostly “lumbering dumbasses” who soaked up toxic debt voluntarily.

            So you’re a big bank shreeky?..? Who knew?!

        2. Gimme a break. The Fed only bought a couple trillion worth. Lunch money, right?

          1. The Fed is still buying Treasuries – down to $45 billion a month now. Their b/s shows over $3 trillion on it.

            So what? That is not money derived from taxes or supplied by taxpayers in any way.

            1. …..You can’t be serious

              1. Very serious. It is just an asset swap.

                Dollars for Treasuries.

                1. Palin’s Buttplug|5.12.14 @ 6:09PM|#
                  “Very serious. It is just an asset swap.
                  Dollars for Treasuries.”

                  Very stupid; one asset is a liquid asset, the other is an IOU.

            2. “So what? That is not money derived from taxes or supplied by taxpayers in any way.”

              Yeah, the Fed has been growing tomatoes in the back yard and selling them.

            3. So where does it come from then – the thin air coming out of the Fed’s ass? C’mon, tell us where the Fed gets this money.

              1. Are you serious?

                It does come from “thin air”. The Fed is allowed to create money.

                1. It does come from “thin air”. The Fed is allowed to create money.

                  And yet you think that doesn’t “come from the taxpayers in any way”? What do you think it does to the purchasing power of dollars already in existence and held by those taxpayers?

                  1. QE money creation is not permanent. If (a big if) inflation rears its head and the economy is ripping the Fed will sell the Treasuries and destroy that money – thus tamping down any nascent inflation.

                    1. Palin’s Buttplug|5.12.14 @ 6:38PM|#
                      ‘QE money creation is not permanent. If (a big if) inflation rears its head, unicorns will fart magic dust and everything will be fine’

                    2. But inflation is the sign of a healthy economy, right?

                      OK, let’s play your game.

                      Let’s say on 1/1/15 the economy is back to its long term ~3% growth rate. Inflation is running a healthy 2.5% and interest rates on the 10yr are 5%. Now the Fed is ready to unload all of its notes at the oh-so-competitive rate of… *drum roll* 2%. Lessee, I can buy a note with a 5% interest that will actually make money over the current rate of inflation, or I can buy a note with a negative rate of return. Let’s think about this. Hmm, nah, think I’ll go with the higher rate of return.

                      OR, I’d be willing to give you less than the face value of the old note you’re trying to sell. But if I do that, then there’s a net increase in the number of dollars in the system, and the Fed has not fully sanitized its free money. Remind me what the definition of inflation is again.

                    3. Yes, there would be a small “loss” – if you can call it that.

                      But hardly a factor in adding to inflation.

                    4. I call it inflating the money supply, because that’s exactly what it is. That doesn’t even count the interest the government is “paying” (and spending) itself.

                      Of course, it only gets worse if the Fed stops paying interest on the reserves it’s holding for the major banks. That’s really the only reason it’s policies haven’t created massive inflation already. But don’t worry. We’ll magically put all of that genie back in the bottle…

                    5. “Of course, it only gets worse if the Fed stops paying interest on the reserves it’s holding for the major banks. That’s really the only reason it’s policies haven’t created massive inflation already. But don’t worry. We’ll magically put all of that genie back in the bottle…”

                      To deal with this in real terms as opposed to shreek’s or the gov’t’s:
                      We (taxpayers) are paying someone to borrow money from us. That reverses the time value of money; by this standard, money in the future is worth more than money now. The only way possible for this to function in a market requires deflation.
                      We do not have that. Regardless of whether most prices are showing it (and I suggest they are, even to proggies; see the push for a higher M/W), printing money absent any increased value *IS* inflation (thx, sasob).
                      It took 70 years for the lie of “communist economy” to collapse, but that government was ‘way more cut off from the market than is ours. This cannot and will not stand; people will not long pay you to borrow from them.

                    6. Palin’s Buttplug|5.12.14 @ 6:38PM|#

                      QE money creation is not permanent. If (a big if) inflation rears its head and the economy is ripping the Fed will sell the Treasuries and destroy that money – thus tamping down any nascent inflation.

                      So if some guy were to write a check on an account containing insufficient funds and use the money to go play the ponies or the roulette table, it would be okay because it isn’t “permanent” – he’s going to deposit money into that account to cover the hot check just as soon as he collects his winnings. No harm, no foul – right? What could go wrong? Except that he’s using someone else’s purchasing power without permission, without security, and without paying any interest. Have you ever heard of something called check kiting? It was generally frowned upon by the authorities.

                    7. Quite aside from all that, the QE money creation is the inflation, whether it is permanent or otherwise, because money and/or credit expansion is the definition of inflation. Rising prices or price inflation? That’s not inflation in and of itself, but is often a result of inflation – obfuscation to the contrary notwithstanding.

                      And NotAnotherSkippy, just above, explains the mechanics involved. There are reasons why it is illegal for someone to counterfeit or create money “out of thin air.” It is because it is harmful to people; it is no less harmful when done by a government or a central bank.

                    8. If (a big if) inflation rears its head and the economy is ripping the Fed will sell the Treasuries and destroy that money – thus tamping down any nascent inflation.

                      Except that the treasuries held by the Fed are short term and as the are paid off the money is remitted to the treasury.

                      Said remittances are the main reason that the deficit has declined over the last several years.

                      So it is entirely possible that the fed will not have treasuries to sell if and when inflation hits.

                2. ‘It does come from “thin air”. The Fed is allowed to DEBASE money.”

                  Fixed, dumb ass.

  3. Another great Bush program.

    1. About $475 billion in Treasuries held by the Fed at President Obama’s inaugeration. Added almost $2 trillion since then. Hard to blame it all on a guy who has been gone for 5 years.

      So what happens when the Iron Bank of Braavos calls the notes? Cersei Obama gonna start shitting gold bricks?

      1. Those better be obsidian bricks, racist.

        1. So? I squat and strain corrected.

    2. Another great Bush program.

      Which both McCain and Obama signed off on before Bush’s term was even up.

  4. the government is not here to make a profit otherwise they could take over any thing they want and claim the profit gained was worth the taking which would of course make our government a fascist government.
    which I think it has become anyway so what difference does it make now.

    1. Exactly the point. It’s a bit like saying that a burglar stimulates the economy when he steals and fences stuf from your house.

      Can’t have proper socialism with a seasoning of fascism.

  5. I’d be interested to read Suderman’s take on TARP.

  6. “The Obama camp can’t stop clucking about how he saved GM and the car industry. But if the GM bailout is such a success story, why can’t it pay back its debt to taxpayers?
    […]
    GM, on the other hand, still owes more than half the $50 billion in federal funds it received when the combination of the recession and its costly union contracts drove it into bankruptcy. And its lending arm, GMAC (now Ally Financial), still owes $14.5 billion.
    What’s worse, it’s not clear that GM actually repaid what it’s gotten credit for repaying.”
    http://news.investors.com/ibd-…..ailout.htm

    How about “If you like your doctor…”

    1. Out of date. Gm bought back it’s shares in December 2013 for less than we paid for them. I think we lost $15 million on the deal.

      1. Billion, actually. I thought we just sold on the open market for a loss, but maybe GM did repurchase directly. Too lazy to google for confirmation either way.

        1. Regardless, we’re short $15Bn.

          1. That doesn’t count the $30 billion that was stolen from GM’s secured creditors by the US administration’s extra-legal say-so. Since this theft matches roughly half of the “profit” on the TARP program, it is even harder to claim a roaring success as an investment.

            It certainly makes it easier to turn a profit if you are able to strong-arm billions from unwilling partners.

  7. TARP was a smokescreen. Geithner proposed the Stress Test be applied in incremental stages. By the time Phase 1 was implemented the Federal Reserve had pumped 8,000,000,000,000 (trillion) dollars into banks foreign and domestic, and didn’t stop until 16 trillion was injected. (Thank Ron Paul for those numbers when the Fed produced an audit.

    I’ve read the interest rate on these loans is .01% but feel to correct me if I’m wrong.

    All that money created out of hot air coming from Congress. That topped off the commodity bubble that started when we invaded Iraq.

    TARP was really inconsequential.

  8. What I really want to know is whether TuboTax Tim has properly paid taxes on his book royalties…

  9. Just roll with the punches dude.

    http://www.YourAnon.tk

    1. Good advice. Confucius say the strong giant of the forest is snapped by the typhoon, but the weaker sapling merely bows, then rises to stand straight yet again.

  10. Receiving huge amounts of govt money would help any business. That pesky task of capital formation is hindering growth! Bastiat was wrong! Smash windows, destroy crops, crush clunkers! We produce more when we destroy what has been produced. What could possibly go wrong?

  11. I just realized that bailouts are a kind of de-regulation. They mess with the self-regulation of the market.

  12. In the case of the car companies, wasn’t there a left-hand right-hand shell game where they were given “grants” which were then used to pay back the “loans”? Did the left-hand then pay back interest to the right-hand out of these “grants”?

  13. But if the govenrment doesn’t DO SOMETHING, things will always get worse. Nothing gets better by not doing nothing. Without the government always there to DO SOMETHING, we’d all be living in caves and eating insects.

  14. Listened to him (again) on Rose the other night. He doesn’t understand the Depression AT ALL. Accepts the conventional Keynesian view like Bernanke. Altho banks failed from 1929 to 1932, they were shuttered by a president who used the crisis to gain office. Secondly, going off the gold standard (another broken FDR promise) and the spending did nothing but make recovery more difficult by insuring everybody. AND the latter was begun by the previous admin, as it was this time. There was no shortage of monetary and fiscal “stimulus” under Hoover. The problem was that the banks held more reserves in large part because of lowered interest rates, while confidence was lost in the dollar, and the money supply fell rather than seeing an expected increase. In essence ppl called for deflation, and the Fed’s and admin’s inflationary policies only exacerbated the situation. Still, as now, it was the overextended construction and capital goods industries which took the hit, not consumer goods. We have in no way recovered. IMHO they did all of it to keep America atop a worldwide Ponzi scheme. I find it amusing that Summers looks like Yellen and Geithner like Summers. Reminds me of NBC.

  15. Saying that just because the government turned a profit on these assets that private investors would have as well greatly misstates what the situation was back in late 2008. The reason that the TARP was put in place was because the government couldn’t find any private investors to buy these assets in the first place. For example, as part of its agreement to purchase Lehman Brothers, JP Morgan insisted that it not be saddled with Lehman’s losses.

    Private investors weren’t buying into these assets because the markets for them had seized up. Only an investor who had pockets deep enough to throw good money after bad and had the wherewithal to ride out the bottom of the market could have purchased these assets AND made a profit off of them. The vast majority of private investors with the kinds of cash reserves available to do something like that are large corporations, like GE, who would have been pilloried by their shareholders if they had bought these assets, and corrupt third world despots, which the American people would have been in an uproar about had they bought these assets.

    But, of course, profit wasn’t what was motivating these asset purchases. They were instead motivated by unseizing the market. They were intended to do the same thing that the Fed’s pumping cash into the market was intended to do: get private investors buying and selling again. Using that as the real measure of success, they worked like a charm.

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