Michael Maiello's picture

    No, TARP Was Not A Success

    By Michael Maiello on Fri, 10/01/2010 - 11:07am |

    We're now getting a flurry of stories from the Treasury telling us that TARP, unpopular though it may be, was not only effective but cheaper than the worst case scenarios that the government envisioned when the program began.

    The New York Times says the program is only going to wind up costing $50 billion, rather than the $700 billion committed or the nearly $400 billion spent.  If our exits from AIG, GM and Ally Financial go well, we could even make money!

    Before I call shenanigans on this, a little background: every time the government bails out private industry it winds up with the government later trying to convince its citizens that the bailout didn't cost as much as was feared and that, over time, the taxpayer even made money.  Every time.  It happened after the government bailed out Lockheed in the 70s, after it bailed out Chrysler in the 80s and after it bailed out the S&L's in the 90s,  Now it's happening again.  "See, it worked," is the governments best argument in support of future bailouts. 

    The government needs this argument because people across the political spectrum hate bailouts.  Bailouts are always unfair.  In this case, rich Goldman bankers got their bonuses while regular Americans suffered.  But I'd even say it's true of GM where not only did the outgoing CEO got a multimillion dollar retirement package financed by fine people like you but some rank and file workers got to keep their jobs while people in other industries that shed good middle class jobs (media, construction, technology) didn't get any help at all.  All bailouts involve the government favoring on group of people over others. Berkshire Hathaway's Charlie Munger even recently defended this, arguing that the banks had to be saved but that the mass of Americans also had to be left to fend for themselves lest our entire society become distorted by moral hazards.

    In the run-up to TARP, it was widely claimed that the government's response to the S&L crisis, which was similar but on a smaller scale, worked in taxpayer's favor.  Actually, the argument went that the Resolution Trust Corp., one of the entities created to deal with the crisis, would up as a profitable venture.  But the RTC was only one part of the government's response.  According to the FDIC, the response to the 1991 crisis actually cost taxpayers $124 billion by 2000.

    I think that's what's going on here with these optimistic "TARP might make us money" stories.  Barry Ritholtz lays out why it's absurd to think that we'll make a bunch of money on our AIG investment here.  AIG owes us $130 billion.  AIG's market cap, with the government owning 92% of its common shares, meaning that other investors see a government assurance against failure, is $30 billion.  That is not a healthy ratio of debt to equity.  Meanwhile, AIG is selling assets, not growing them.  So as the government seeks to exit its position, reducing its stake and also reducing its promise against failure, and AIG's business shrinks as it sells off its best assets, how do we expect it's market value to go up?  I think you have to add at least $130 billion back into the TARP bill right there.

    Then there's GM.  GM is now a much smaller company than it once was.  The point, after all, was to streamline it.  But for the Treasury to make money on its investment, GM will need to go public (which it's doing) but will also have to eventually earn a market capitalization substantially in excess of the highest market value the company has ever had, and it will have to do so as a much smaller company than it's been in a long time.  I hope it works but you might read from my tone that I have my doubts.

    Related to GM is Allly Financial.  We own more than 90% of that.  It's the former captive lender of GM and it's job was to loan people money so they could buy cars.  For some reason it also loaned people money to buy homes. A recent GM filing says that Ally is worth close to $7 billion and hey, a financial company with a cleaned up balance sheet would be a nice asset for the government to sell on our behalf.  But oh, wait a minute, it's at the center of the foreclosure crisis and has been accused of dirty dealings against homeowners.  Eh, we'll probably make a pittance on this one.  This is not the kind of world that ever seriously punishes a company for stealing from troubled mortgage borrowers.

    Speaking of... keep the second "to be sure" paragraph in the Times story in mind: "A final accounting of the government’s full range of interventions in the economy, including the bailouts of the mortgage finance giants Fannie Mae and Freddie Mac, is years off and will most likely remain controversial and potentially costly."

    So there's no doubt that the entire bailout, which includes but is not limited to TARP is going to wind up costing us a bunch of money.  But the next time some favored industry gets in trouble and the government wants to help, Treasury officials will tell the angry rabble on the left and right "We made money on TARP!"  Just like the claim "We made money on the RTC" only told part of the story of the S&L bailout, this will only tell part of the story about the financial system rescue.

    Whether or not you think it was the right thing to do, the financial rescue did not and will likely never, "make money for the taxpayer."  Future bailouts should be supported by other arguments, to the extent that they can be.

    Comments

    You mean the "Troubled Asset Relief Program" didn't work?

    Funny, that!

    I kinda' remember there being something in this emergency measure that included dealing with troubled assets. It seemed rather important at the time to do something about all these sub-prime mortgages. It seems lenders and their clients had somehow managed to build a housing bubble that crashed, and the consequences were pretty dire for both partners in that venture.

    It seems the lenders were pretty well taken care of, with bonuses paid all around with the taxpayer dollars we contributed.

    And it seems that the foreclosures keep running at a record-setting pace.

    Funny, that!


    by SleepinJeezus on Fri, 10/01/2010 - 11:28am

    Lying again Destor? I mean hell I got this great sign out of TARP:

    So quit lying about it not working!!

    Wait, what?


    by tmccarthy0 on Fri, 10/01/2010 - 11:33am

    That's it, I'm taking my shirt off.


    by Michael Maiello on Fri, 10/01/2010 - 11:35am

    You will just use any excuse to rip that thing off, won't you? Well, if you do it, do it slowly, with verve, and let me see it frame by frame. Innocent


    by tmccarthy0 on Fri, 10/01/2010 - 11:42am

    Sorry destor, but I have a lot of trouble getting worked up about this.  Whether the bailouts end up making us money or costing us money, the fact is that they are not going to cost all that much - and they were necessary.

    It's become a bit conventional to pooh-pooh the depth of the economic calamity that occurred in 2008, and suggest that if we had just let everything crash, we would have turned out all right.  I don't buy it.   I'm still convinced that if events had not been arrested with emergency rescues and massive emergency stimulus, we would be facing unemployment now that would be at least double the current horrible rates, and levels of dislocation, social disruption and despair that would make todays tea party grousing look like a picnic.

    I suppose I would like our government to do more engineering of the economic and financial landscape to make sure there are no more "too big to fail" companies.  But until that sunny day arrives, Too Big To Fail is a regrettable reality.

    Too big to fail is the inevitable by-product of weak regulation and a laissez- faire system.  Such systems have been shown time after time to lead to monopolistic behavior and the concentration of wealth in a few powerful hands.  The public doesn't like that?  Then they should be advocating for more energetic and activist government intervention in the economy, not less.

    I don't believe in the small government Republican and libertarian approach of letting failed companies crash and burn on their own so that the rugged free market laws of "moral hazard" and social Darwinism can be enforced.  I believe in a government that uses its power to engineer soft landings in turbulent time.  I believe in government intervention to halt the complete evaporation of retirement savings, and the devastation of commerce and prosperity.

    These companies aren't just a handful of rich guys grabbing bonuses.   They have millions of employees and impact many millions more people whose economic fortunes are, for better or worse, entangled with the fortunes of large corporations.  We should have demanded overhauls that spiked these bonuses and brought in a new and more rational, less wasteful system of compensation for finance industry work.  But that doesn't mean we wouldn't have had to do the bailouts.  We just needed bailouts plus some good old lefty social-economic engineering.

    I am disgusted that we have let the far right win the popular economic debate, and that standard Keynesian management of the economy, including such tried-and-true techniques as deficit-spending, fiscal stimulus, jobs programs, government receiverships and engineered bailouts is now deplored by the masses, for whom a laissez faire right-populist approach of Beck, Paul and House Republicans has become the new common sense.

    I supported these bailouts when they happened, as a necessary intervention in the economy to prevent widespread collapse of commerce and finanace.  I supported the stimulus package, even though I knew it would jack up the deficit.  I'm disappointed in some of our politicians for a variety of things, but I'm not going to stab them in the back for supporting measures that were tough, risky and necessary, and that were bound to produce the head-in-the-sand, no-nothing populist backlash they have given us in this election cycle.

    I will continue to support these kinds of government actions in response to economic crises, and also advocate for even more aggressive and redistributive government intervention on behalf of a more egalitarian society, with a strong safety nets and energetic public investments.


    by Dan Kervick on Fri, 10/01/2010 - 3:05pm

    This is one of the most lucid and penetrating comments that I have read in some time. Thanks Dan.


    by Michael Wolraich on Fri, 10/01/2010 - 3:24pm

    That was pretty darned good, wasn't it?  I mean, it's wrong because it disagrees with me, natch.  Kidding.  Definitely good points here but I think the government rewarded the wrong people and left the wrong people to hang.  I think engineering soft landings and Keynesian management are fine and worthy goals but shouldn't be structured in a way that rewards the people who caused the crisis.  Lloyd Blankfein and Jamie Dimon need to be out golfing with Dick Fuld, not still running the financial system.


    by Michael Maiello on Fri, 10/01/2010 - 4:01pm

    Lloyd Blankfein and Jamie Dimon need to be out golfing with Dick Fuld, not still running the financial system.

    Yes, indeed.  And we need to get our hands on some of their money.

    I think everyone except the people who run our major news organizations and major corporations has figured out by now that the way wealth flows in this country, the way people are compensated for the work they do - and the non-work - does not reflect some unfathomable and unimpeachably wise invisible hand magic, nor the sacred and unalterable arrangements of property-rights based Justice and Liberty themselves.   They are in part just a collection of rackets.  The flow of wealth in a society is the work of human beings, established by imperfect and corruptible and greedy human agents.   If rational deliberation shows the wealth is flowing in an unjust, inefficient and wasteful manner, we can re-design its flow to serve the common good better.


    by Dan Kervick on Fri, 10/01/2010 - 4:48pm

    I thank Dan for responding, because your argument was so well done and so convincing, but I still didn't agree with it. Problem was I didn't know how to say so without saying stuff that looked stoopid or having to research my comment for a week like a term paper. Smile Ya both did good, and that fits with on the whole I don't like the idea that we have to rah rah cheer government on for doing it's job, even if we think they did the right thing, there is always room for improvement, as they say.


    by artappraiser on Fri, 10/01/2010 - 5:03pm

    Yes, I understand the part about the rah-rah stuff, AA.  I am just worried that progressive Democrats are in danger of being seduced into aligning themselves with right wing versions of populism, like Beck's and Paul's, that preach the free market fundamentalist "shit happens" philosophy that the proper governmental approach to economic calamity is just to let all the shit fall without interference and relief from the government, and then let private initiative and enterprise pick up all the pieces without assistance from the government.

    One of the basic Republican lines over the past two years is that Roosevelt and the New Deal actually prolonged and worsened the Great Depression, and we should have just left it to the privarte economy to dig us out.  And lately, some of the things I hear from some Democrats lends itself to the interpretation that they actually agree with this line.

    Also, I just wanted to make a personal statement.   I don't mind continuing to criticize people for decisions that I myself opposed at that the time, especially the public option cave-in and some Middle east foreign policy decisions.  But I personally did support the bailout strongly and I did support the stimulus package strongly.  So I would feel like a cowardly back-stabber if I just went along with the angry crowd and let the politicians who supported these things dangle out there without anyone having their back at least on the score of the things they did right.

    I guess in the end I just do believe the administration position that they had to do these things, deficits be damned and populist backlash be damned, in order to prevent disaster.   I wish they had done much more.   But it is important that the left doesn't allow its justifiable criticisms of the things the Democrats failed to do be transformed and co-opted into unjustified right-wing criticisms of the things they had to do.


    by Dan Kervick on Fri, 10/01/2010 - 5:35pm

    I, too, very strongly supported the "bank bailout" (although I object to that revisionist term from the original "TARP"), as well as the stimulus plan (wanted it to be bigger) and the GM/Chrysler bailout. And all for the same reasons you have offered here.

    What I abhor is the bait-and-switch that was pulled on TARP that allowed the bankers to be made whole while doing little or nothing to actually address the problems at the Main Street level. (See my comments below.) To Ghengis' point, above, we received collateral benefit from preventing the meltdown of Wall Street, but it was simply an accidental consequence of the money-grabbing plan to serve Wall Street as exercised. Sub-Prime Mortgages nevertheless remain as an intractable problem that could otherwise have been more effectively addressed given the amount of monies that were spent on this bailout.


    by SleepinJeezus on Sat, 10/02/2010 - 6:21am

    I actually agree with you, well said.


    by tmccarthy0 on Fri, 10/01/2010 - 3:31pm

    Action was necessary.  Most people who understand what was happening don't dispute that.  What is disputed is the approach, which was top-down with an eye for saving institutions and, most importantly, their investors.

    SleepinJeezus just fingered the elephant in the room above - foreclosures.  Why was the bailout executed from the top down in order to spare investors, instead of bottom up?  It was a supply-side move, not at all what the neo-Keynesians were recommending.

    So, I agree with your comment generally, but I think it misunderstands what TARP got wrong.  Yes, a move needed to be made.  The question is why that move was to make whole the investing class instead of offering security to homeowners to directly.

    Additionally, the nature of leverage implies that such a move could well have been cheaper.


    by DF on Fri, 10/01/2010 - 3:54pm

    SleepinJeezus just fingered the elephant in the room above - foreclosures.  Why was the bailout executed from the top down in order to spare investors, instead of bottom up?  It was a supply-side move, not at all what the neo-Keynesians were recommending.

    I definitely agree with this DF.  A more progressive approach would not have used the crisis to sell and launch a new vigorous left movement.  It would have taken advantage of the crisis, with its widespread popular outrage and hatred of bankers and its new, broad-based and spirited public skepticism about the claims of market fundamentalists and laissez fairists, to push through a no-nonsense, no-BS redistributive program to fund a demand-driven bottom-up recovery, put more people to work and and help struggling Americans dig out from their mountains of debt and the anxiety of vanished wealth.

    I would have bailed the finance houses out, but attached more strings, demanded more restructuting and re-organization, and given the bankers fewer options.  Of course, you can't just wipe out the investors, since the investors ultimately are a lot of us, with our retirement plans.


    by Dan Kervick on Fri, 10/01/2010 - 4:37pm

    Sure.  Here in California, we have two massive pension funds that were heavily invested in what became troubled securities.  I'm not suggesting that the investors simply be wiped out, but rather that making them secure could have happened from the bottom-up - that is that we could have guaranteed and/or puchased mortgages directly instead of the derivative financial products based on those mortgages.  If the mortgages are good, the securities are good.  What we did was basically guarantee the derivative despite the condition of the underlying assets.  As you mention, reorganization of insolvent entities should have been part of the process.

    I would argue that CDSs should not have been secured.  They are essentially an unregulated form of insurance that was created to avoid the capital reserve requirements that are in place for traditional insurance products.  But, again, if the intervention had occured from the bottom up, those bets wouldn't necessarily be called.


    by DF on Fri, 10/01/2010 - 5:07pm

    Agree that it was a good comment (and he didn't even have to insult anyone to get noticed), agree that the wrong people were rewarded, but I also wonder if the government is being an enabler of an economy that was built on growth, but by all rights should be shrinking.


    by Donal on Fri, 10/01/2010 - 4:07pm

    The issue you raise, donal, is definitely the REAL "elephant in the room." As "we" (ahem!) attempt to globalize the consumer-driven economy, the unsustainability of such an approach to economics become glaringly obvious. In this case, we actually have a whole science of economics that is fatally flawed, and yet it is the rulebook by which we all play.

    I find myself advocating for changes within the present rules to introduce some degree of justice into the equation. Yet, like you, I'm uncomfortably aware that advocating for the continuation of this economic system at all is a fool's errand in the long run.

    It's an interesting conundrum, and yet we can't even begin to discuss it in today's political environment without sparking knee-jerk condemnation involving charges of "socialism" and "anti-American radicals" and blah, blah, blah. Yet, it's a discussion that cannot be postponed much longer as we continue consuming non-renewable resources to fuel the required growth of our consumer economy.


    by SleepinJeezus on Sat, 10/02/2010 - 6:32am

    I just wrote some drivel about outsourcing.

    TARP may have been the ultimate example of outsourcing. We just outsource our monies to the biggest most felonious private institutions in the world while they pay top management all the borrowed funds.

    Amazing, just fucking amazing!!


    by Richard Day on Fri, 10/01/2010 - 5:19pm

    What's even more impressive is that the reason we grant private institutions the license to create American dollars and charge Americans interest for those dollars is because, via their rational self-interest and the immutable efficiency of markets, they are supposed to be better at allocating those funds than would public institutions in similar service.


    by DF on Fri, 10/01/2010 - 5:27pm

    After Googling Larry Summers, I see a correlation with the financial course we took and why it failed.

    Lawrence Henry Summers was all about free markets.

    While Bill Clinton was President, Larry Summers advocated NAFTA.

    Look how well that worked out for Mexico and our nations immigration problem.

    Great for monied interests, bad for the workers. 

    Summers also an advocate for higher education as the answer to a nations wealth creation, but tough for those at the bottom.

    Tough for those at the bottomm as industry goes where labor is cheap, and the country allows cheap labor to undercut our Nations uneducated. Cheaper costs for those with money   

    Especially if your higher education involves Wall Street, you’ll make lots of money.  

    THE BAILOUT WAS NEVER GOING TO GO TO THE PEASANT CLASS DIRECTLY

     Larry Summers was never going to support, helping the people directly, he would have seen that as Socialism.

    http://www.angrybearblog.com/2009/04/larry-summers-and-senator-dorgan.html 

    “Later D.E. Shaw, one of the largest hedge funds in the world, hiredhim for his mathematical acumen in finance, dynamic hedging and Libor rates......
    Summers now argues that the work gave him valuable insight into the inner workings of high finance, cleverly spinning his employment as a reason to trust him now.......
    Apparently, Summers earned his keep to the tune of $5.2 million dollars. D.E. Shaw feels far more comfortable with Summers now in charge of the economic recovery plan than they otherwise might.......


    Frankly, I do not. Financiers have become all too clever in wringing the last dollar--all in the name of market efficiency--from the unwary consumer.....
    Yet later at the World Bank, Lawrence Henry Summers signed off on a memo that encouraged toxic dumping in underdeveloped countries.

    ENCOURAGED TOXIC DUMPING?

    "Where was the astute and brilliant Secretary Summers, protege of the Rubin who found a home in Citibank?......
    As far as I can tell, he saw this kind of deregulation as increasing international efficiency and competition--all arguments the moneyed boys were making......
    Yes, he was one of the many Democratic leaders lending a helping hand to passage of the FSM Act. Summers has the dubious honor of sharing nesting privileges with that free market vulture Phil Graham.”

    “For Summers, Chinese labor, tax, and environmental arbitrage are pluses for American companies inside China. Profits would be huge--and indeed they were. Besides, cheap Chinese sweat-shop labor will force Americans to work for less. (Perhaps we should have sweat shops for financial wizards.).....
    But maybe I am being to harsh to label Summers as a corporate shill. Yet, Summers never spoke about labor conditions inside China. He was not worried that labor could not freely organize in China.”     end quotes

    Larry Summers believed, if you open up markets, then third world countries wouldn’t have to live in shanties, they wouldn’t have to live in poverty. 

    Well no thanks to Larry Summers our country is heading down the road to equalization, the whole world can live in poverty, except for Larry Summers buddies.   

    Was it a Summer’ recovery?

    http://www.youtube.com/watch?v=Ugp5g-Ttd5Q 

    Good riddance Lawrence Henry Summers, your theories and ideas, helped to destoy the Democratic Party and impoverish our Nation.

    Americans now get to pay for your experiment, loser 


    by Resistance on Fri, 10/01/2010 - 9:32pm

    This is all really fascinating to me, especially the notion, that we hear so much, that globalization will raise other nations and other people out of poverty.

    Indeed, globalization will narrow the gap between the standards of living that people enjpy in developed nations and tolerate in emerging nations.  But it will equalize this less by raising up the world's population and more by diminishing the standards that people in developed economies enjoy.  It's a lot like when people say that public employee pensions are too generous, compared to private sector pensions.  One could, if they chose to, have made the same point by saying "private sector pensions are too stingy compared to public sector pensions."  But nobody serious ever says that.  And Larry Summers would certainly never say that.  And I think you know why.


    by Michael Maiello on Fri, 10/01/2010 - 10:18pm

    This is true, Des. It is an interesting can of worms. The standard of living in our country for most people is going to go down. The richest will do fine, but others are going to have a tough time, and the middle class may never regain its former place in the country.

    I'm open to suggestions on how it could have been avoided, but as I work through it in my mind, I just don't come up with good ideas. Raising wages won't work, because prices just go up to cover that cost, so it equals out. You make more, but everything costs more, so you're lucky to break even. And the safety net gets more and more expensive.

    We're faced with  a large portion of the world willing to work for significantly less than we will. Corporations already pay very little in taxes, so I don't see how tax incentives would help anything.

    I know it seems almost unthinkable that ours was the last generation to do better than their parents, but, I believe we need to at least start considering the idea, if not begin getting used to it/accepting it.

    I am very much in favor of coming up with a way of valuing labor that takes into consideration the difficulty and strenuousness of a job. There is no way that a 50 year old  miner in W. Virginia working under terrible conditions deserves to live in poverty while a 20 something on Wall St. sitting behind a desk selling thin air to unsuspecting victims is living large. But how do you do that? How do you force companies to bring manufacturing jobs back here? And I don't mean pie in the sky stuff, like our elected officials doing it, because if we've learned anything in the last year, it is that they won't.

    So help me out here... How do we get business to care about our people, over profits?

     


    by stillidealistic on Fri, 10/01/2010 - 11:27pm

    The "pie in the sky" stuff is precisely the ONLY way you get these companies to "care" for the welfare of the workers. Corporations are sociopathic. They care about one thing: Their own short-term profit. That's not an inflammatory statement. It's a fact; it's written into their charter. There is simply no other objective that is reasonably pursued by a corporation. In many cases, even their own long-term benefit will be compromised by their need to produce next-quarter profit for the shareholders. That is their reason for being.

    You are right to deride "Pie in the sky stuff" given the wholesale ownership of Washington by the corporations. With NAFTA and other policies that promote the laissez faire globalist economy, our Congress has become simply an extension of the corporations, all with the same objectives.

    But you are wrong to dismiss the "pie in the sky stuff."

    Government regulation is the ONLY solution.

    But you ask for concrete, plausible solutions. There are two concrete steps that can be taken to get us on the right path:

    #1: Insist that our government be weaned from the teat of corporate campaign financing. For so long as government is owned by the corporations, we cannot reasonably expect that government will EVER be able to stand in the way of corporate profits, regardless of how such a stance might serve the interests of the governed. Instead, we will all be left as a global "human resource" to be consumed at the cheapest ("most efficient") price, only to be discarded for the next batch of resources (see China, India, Malaysia, etc.) when we are used up.

    #2: Close the unsustainable Escher diagram that separates workers from consumers. You cannot make cheap products in VietNam and other third--world economies for sale in the U.S. without everything eventually grinding to a halt. Vietnamese workers cannot afford to buy the product on their wages. Unemployed U.S. consumers cannot buy the product in the absence of income. Pretty easily understood, and I think we are now beginning to witness the way in which the economy will go dead in the water in the face of such an unsustainably broken loop between consumers and production labor. In the meantime (i.e. "short term") there is substantial profit to be made as the system gets bled dry. The solution is really quite simple: Tariffs and other policies that insist "If you make a widget in Whackystan, then you sell it in Whackystan and contribute to the development of THAT economy." In this circumstance, "Free Trade" can become a tool for developing third world economies, rather than a continuation of repressive colonial practices that promote injustice and inflame hatreds toward the western economies.

    I see no other path out of this madness we call "Free Trade." "Pie in the sky" it is, and our future depends on it.


    by SleepinJeezus on Sat, 10/02/2010 - 12:09am

    When wages rises, prices do rise, but usually not at the same rate?  Why?  Competition for money.  If you put a bunch of money in the hands of consumers, producers will compete to get those dollars and they'll usually compete on price.  So the cost of eggs might go up a dollar but some other producer will only raise prices by 95 cents and try to make up that nickel on volume.  So long as there's no price fixing or collusion, this will generally work out.  That's why, up until this era of globalization, wages have tended to outpace inflation.

    As for what we could have done -- the Federal Reserve's charter is incredibly expansive.  The Fed can actually loan money to anyone, not just banks.  This makes the Fed unique among central banks in the world.  Had I been in charge of the Fed during the financial crisis, I also would have realized that the banks were in trouble because their customers could not make their credit card and mortgage debt payments.  But instead of giving money to the banks, I'd have bought their debt at depressed market levels in 2008 and then I would have found the underlying borrowers and refinanced.  I'd have said, "I bought your loan for 50 cents on the dollar.  So now you only owe half of what you thought you did."  That would amount to a free lunch for everyone but the bank.  The bank would get cash upfront.  The borrower would see a $5,000 credit card bill cut to $2,500.  The Fed would break even so long as the borrower paid what's left.  If the borrower really can't pay because the borrower is unemployed or tragedy has struck, the Fed could just cancel the debt and eat the loss.  Losses would still be less than what the Fed ienduring now and because in this case the Fed would have solved the economy's demand problem by giving the consumer a massive do-over so defaults would not be anywhere near as bad as what we're seeing now.  Oh and for people with no debt and modest means?  The Treasury should give them a tax refund so that they get something too and to stimulate demand.

    Would my plan be inflationary?  Yes.  But not wildly so.  Producers would still need to compete, in a global market, to tap the resources of my recapitalized American consumer.

    I'm sure I've made some mistakes here but what I most want to stress is that there are answers.  They just require our financial leaders to think creatively.


    by Michael Maiello on Sat, 10/02/2010 - 4:44am

    Very well considered, destor. Thanks for this.

    You've done a great job iterating what I thought was the plan when Paulson wrote out his one page plan to secure the hundreds of billions in cash in Fall of 2008. It was all about purchasing toxic assets, which were identified then as sub-prime mortgages. (Most people had hardly ever heard of Credit Default Swaps and such at the time.) This is essentially what the taxpayer was led to believe he was supporting when these monies were dedicated to relief. It was a good plan that would have allowed for a "do over" as you call it; would have bought time to appropriately regulate the industry (including fixing "Too Big To Fail." Remember that?); and would have regenerated monies into the hands of the consumer to allow the recovery to take root in sustainable fashion.

    Having secured the funding for this "Troubled Asset Relief Program," Paulson and Geithner instead steered funds toward propping up AIG's gambling obligations at parity - dollar for dollar. This, alone, resulted in a $12.9 BILLION DOLLAR blessing to Goldman Sachs, who were wholly reimbursed in this amount for their gambling debts that had been placed with AIG and that were not (and never could have been!) secured. Then, other monies were used to buy banks, themselves, rather than deal with purchasing the toxic assets in any manner such as you so elegantly explain.

    The banks and the casinos were stabilized and held harmless for their excesses that led to the meltdown in the financial industry. Our Treasury was raided in a fashion not seen outside Defense Department Budget parameters. And virtually NOTHING was done to relieve the underlying sub-prime mortgages that have decimated the consumer economy. (Oh, and "Too Big To Fail?" Just imagine a hiccup in GS's earnings, and consider how quickly we'll be called upon to do it all over again.)

    Most importantly, from the political perspective, the pipeline from Wall Street to the campaign coffers of both the Dems and Repubs was kept intact. Homeowners can fall back on that to gain their sustenance, I suppose, as they continue losing their homes in foreclosure at record pace, two years into this crisis.

    If there was any justice to be had in this world gone mad, someone would be in prison by now - and the indictments for conflict-of-interest and grand larceny would reach at least as far as the Treasury Departments of both the Bush and Obama White House.

    Instead, we have politicians wondering why there is such an "enthusiasm gap" among the left - and why there is such widespread (if ill-directed) tea-party anger against a government that is perceived to be incapable of serving the people.

    And so the short answer to stilli's question about how we make this version of our economy work for everyone is that we must all become Wall Street Bankers. Incredibly, no one else really matters to those in charge. I used to think such statements were hyperbole. Then, I lived through the "Troubled Asset Relief Program," and witnessed winners and losers play out like a horror film with result that, two years into this, we still have a domestic economy that is dead in the water with no wind at its back.


    by SleepinJeezus on Sat, 10/02/2010 - 6:01am

    Good ideas, both of you. But, as far as I'm concerned, you can "insist" in one hand, and "you-know-what" in the other, and see which fills up faster...Insist is a lovely word. But that is all it is, a word.

    I agree whole-heartedly that until the corporate/financial influence over our elected officials is eliminated, there is no way out of this. Where we disagree is whether or not it will happen. I know it sounds very defeatist coming from me, the optimistic one, but I believe with every fiber of my being that if it could be done, Obama would have done it.

    I can hear y'all howling as you read that, but seriously. He made ME, someone who, by all demographics, and coming from a very dark place where politicians are concerned, should have run from him, believe again. If HE who was able to do that, could not get the repubs to join with the dems to work for the good of the country and common, every day people, instead of the good of the party, who POSSIBLY could?

    Short of a civil war, I don't see the possible catylist. The entire congress would have to be thrown out and at the same time new rules enacted to keep the money out...The practical me just doesn't see it happening.


    by stillidealistic on Sat, 10/02/2010 - 1:22pm

    Ok, let's backtrack here a little bit and perhaps examine what you DON'T do if you are serious about fixing the problems we confront - even if you are the all-blessed Obama.

    #1: You don't appoint Rahm Emanuel to be Chief of Staff. He was appointed for his ability to play the lobbyists' game, and it was appropriately perceived to be a surrender to politics-as-usual in a move that all but assured Obama would snatch defeat from the jaws of victory. The last two years have shown that perception to be quite accurately held.

    #2: You keep the likes of Paulson and Summers and even Geithner as far away from the keys to the Treasury as you can.

    #3: You don't make deals with the health insurance industry beforehand if you are serious about truly offering legitimate health care reform. You instead say something like "We're going to change the way Washington does business" and then proceed to do so by sticking them in the neck with the full support of the populist movement that brought you into office. Perhaps you come up short of single payer health care as part of legitimate political compromise, or perhaps you discover there is more widespread support for far-reaching reforms than you anticipated. But you damned sure serve notice to the lobbyists that they are not going to outright limit reforms to a degree that meets their approval as the first order of business.

    #4. Ditto with Wall Street. (See #3)

    Your difficulty, stilli, is in your own failure to see that Obama is not an unfortunate victim of circumstance here. Unfortunately, so many of the problems he confronts are of his own making as Rahm and others in Congress have pulled their punches in order to placate their owners. He could have leveraged his populist support to great ends toward reversing so much of the misery and backsliding caused by Reaganomics. He could easily have established that the Bush/Cheney abuses of Executive Power were far beyond what is acceptable in a democratic Republic. He could have easily marginalized the Republicans for the sinister incompetents that they are subsequent to all the failures of their policies that have occurred in the last twenty-plus years. And he could have run over Ben Nelson, and Lieberman, and Blanche Lincoln, and Landrieu, and the other Dem whores in Congress by simply showing them to be what they are instead of playing the game by their rules.

    All of this could have been accomplished with the mandate he received from the electorate to enact "Change We Can Believe In." And he would have placed the Dems in great shape as they face this election. In fact, I even believe he could have co-opted much of the sturm and angst that has driven the Tea Party and thus have robbed Armey and Gingrich, et. al., of their access to this now-misguided populist force. Doubt any of it? Recall for yourself the feeling around the country on the eve of the election as Obama faced the rally in Grant Park, and then tell me what was the expectation among those who placed him in office? And then look what we got instead.

    Obama has pulled his punches in deference to the monied interests that own him. He and the rest of the Palooka-Dems now find themselves flat on their back on the canvas, wondering what hit them. There are some among us, I suppose, who are prepared to mop their brow and cluck "Oh, you poor dear!" But there remains those of us who will continue to scream at them that, at last, it is time to stand up and fight, dammit!

    Even though time is running out.


    by SleepinJeezus on Sat, 10/02/2010 - 3:29pm

    Obviously, I think more highly of him than you do. And I have been paying attention to politics for a short amount of time, so I agree, I'm coming at this from the position of an innocent...I have a lot to learn.

    If everything were as black and white as you portray it, I would just say, yep, I'm wrong. But I think it is all a little more complicated than that. For starters, the economists did not agree on what to do, and they still don't agree. It's hard to believe a situation is cut and dried, when there are intelligent, well thought of people pushing opposite agendas.

    Secondly, blame whoever you want, but the biggest issue is "so where do we go from here?" I don't know what to do. I don't know how to help. I am pissed off, bummed out, and frustrated, but I haven't given up, and I still have the energy and enthusism to fight, but I don't know where to put it. I am open to suggestions.


    by stillidealistic on Sat, 10/02/2010 - 7:31pm

    Creartivity is not the problem, It's who they serve, thats the problem.

    Self serving survival of the fittest.

    The golden rule: who ever has the gold; rules  

    Imagine your Obama, you’ve just won a mandate.

    You realize the Country is faced with a major financial crisis, INHERITED from the previous Administration. 

    What ever should Obama do?

    Hire Larry Summers and Tim Geithner? WT% 

    Were there any minutes taken in conference to show, the policies Larry Summers was promoting? Did it include a realistic view of consumer sentiment? or do we need to invoke the  freedom of informatoion act. 

    The bankers got the bailout and we got Cash for clunkers, we got an $8,000.00 dollar tax credit for buying a house; that may have been bought prematurely, as home devaluations continue.

    Cash for clunkers removed inexpensive cars from the market, the lower income folks would need.

    Let them ride the bus; another head game? We’ll have to raise taxes to get more transportation..  

    Sucker the consumers further, playing head games. 

    Head games were the administrations secret weapon, to end the crisis?  

    My point is the bankers got the real substance and the people got manipulated. Which group is better off today under the financial leadership of Larry Summers.

    Did Summers in his heart say  “Consumers are so fickle, we can bring them around to do they’re part, with unfounded half truths, keep saying the economy is turning around, and the dummies will believe us.” 

    The problem as I see it. There is the REAL life and the fake. 

    The real life say’s don’t owe anybody a single thing and you’ll live free. The fake economy say’s borrow and consume, become enslaved.

    People like Larry Summers who are corporate shills, love slavery.

    Slavery = higher profits.  

    Why did Obama hire Summers? Did his Chief of staff recommend him? Was it cronyism to hire a Harvard professor? 

    Larry’s got his job and home, where’s ours    

    While the  Obama administration attacks the base for being to smart, to see through the head games. We weren’t that stupid. We are still victims of your choices of advisors.

    Who either can't get us out of this mess or won't  

    Cake to the banker class, crumbs to the second class  

    While the rich kids go to Harvard, 

     

    Heck of a job, Brown nose Larry 


    by Resistance on Sat, 10/02/2010 - 10:13am

    I googled to try to find evidence of this, but couldn't: In an interview over a year ago, Elizabeth Warren stated that in her opinion, there wasn't ample evidennce that the economy would have collapsed without TARP.  She didn't elaborate on what measures might have helped, though later she seemed to have favored writing down subprime loans.  I wonder how Ted Kaufman will handle Warren's former job?  He was an incredibly strong advocate for strong regulatory reform.

    The other point you touched on, Destor, that isn't factored in enough to the 'did the bailouts actually make money' issue is the incredible degree to which joblessness, loss of pension equity, massive foreclosures, etc., negatively impacted the economy AND strained social safety nets and unemployment funds.  These should be automatically factored in, shouldn't they?  And the degree to which they will in the future, also.  Without counting the peripheral costs, the figures wouldn't be true, the same way that the oil in the Gulf costs need to account for future health costs, shuttered businesses, etc., not just the immediate loss of production and cleanup. 

    The little I've read about the new model Joseph Stiglitz and Nicholas Sarkozy have been trying to develop for a new approach to measuring GDP, factroing in 'happiness' or contentment, and trust in the future interests me.  I'm picturing the costs we've incurred as a population in fear, doubt about the future, free-floating anxiety, loss of trust in government, etc. concerning the ways TARP and the stimulus were handled.  (I also think that the two should be kept separate in people's minds).  Also the infrastructure and education investments that now go begging will have long-term deleterious effects for all of us.

    The banks won't lend, people can't or won't spend, too many of us have create false boogeymen as 'the fault'; i.e., sub-prime borrowers who were too stupid to deserve their mortgages being written down, 'socialist' politicians who rescued the banks and GM, and wanted to bring back Glass-Steagall or nullify the CFMA, etc.  That Americans are so pissed and frightened has enormous impact on the recovery (or not) in terms of investment in the future.  Who will want to take out massive loans for college in the near future?  As public schools suffer from decrease funding, more people are heading to private charter schools a la Arne Duncan's stupid corporate-influenced education plans, and so on.

    I'm just saying (in far too many words) that the hidden costs of Too Big to Fail bailouts will become Too Big to Save for the American People.


    by we are stardust on Sat, 10/02/2010 - 7:20am

    Arrggh.  I just found this John Talbot piece at Huffpo listing many, many other direct and indirect costs of the bailout, and comes up with a figure of $14.85 trillion.  I haven't a clue about Talbot's accuracy or credibility, but it's a harsh list.

    http://www.huffingtonpost.com/john-r-talbott/tarp-uncovered-the-real-c_b_746959.html


    by we are stardust on Sat, 10/02/2010 - 7:49am

    My thoughts are late and may overlap Dan's comment, but I wanted to correct a fact and add a thought or two:

    First, the AIG numbers mentioned are just plain wrong. If you follow the link and read the associated comments, you'll see that. For example, the author includes in the "amount owed" billions of dollars in loans (the "Maiden Loans") which are backed by securities worth more than the loans. In other words, if AIG's market cap went to $0 tomorrow, we'd still get all of that money back, so it makes no sense to include that in the "$182 million owed." Suffice it to say that's not the only error, and the Treasury's numbers are indeed correct.

    Further, I think it makes sense to split TARP into a couple of categories when discussing its outcome:

    1. Banks (except AIG) - unquestionably profitable.
    2. AIG - breakeven, maybe a small loss.
    3. Automakers - probably a small loss.
    4. Homeowners (mortgage modification programs) - unquestionable loss. In fact, TARP as a whole will likely be profitable but for this loss.


    I'll simply echo Dan's comments with respect for the massive economic damage that would have resulted had the Bush administration and (mostly Democrats) in Congress not had the courage to hold their nose and pass elements #1 & #2. There is no doubt that people who were responsible for the disaster benefited, but that was a necessary price to pay for the catastrophe that was avoided (see studies by Mark Zandi and other independent economists estimating things like 16% unemployment in TARP's absence).

    It's ironic that Tea Party populists blame Obama for those two items, when a) he had nothing to do with them, and b) history may well record that they were the most successful economic policies of our generation. At the same time, they don't seem as angry about #3 & #4, for which he was responsible, and for which the case was less defensible. It's also interesting to note that in the case of the automakers, shareholders were effectively wiped out, and bondholders were punished quite harshly, so it's difficult to argue that they benefited in the same way that bankers did. The automaker bailout also effectively used the US government's balance sheet to accomplish a leveraged buyout of GM by the autoworkers' union, which one would think would cheer progressives and infuriate the Tea Partiers. Oh well.

    The other thing I find interesting is that press attention has focused on whether TARP was profitable, as opposed to whether it ultimately accomplished its objectives (aside from catastrophe averted - check!). TARP's success can't really be measured in terms of its profitability - it has to be measured in terms of whether it created a moral hazard that leaves the financial system vulnerable to another round of excessive risk-taking. The jury is out on that one - the resulting financial reform was better than nothing, but it left a lot on the table.


    by Steve (not verified) on Wed, 10/06/2010 - 8:45pm

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