Guest post from the inimitable Dr. Pitchfork. Buckle up.
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A recent AP “Fact Check” article on last Saturday’s GOP debate indicates that the zombie lies about the success of TARP are still alive, and starving for brains. In the debate, Ron Paul pointed out that TARP and the other bank bailout programs had foisted private bank losses onto the public. This should be a non-controversial claim, but TARP’s apologists have been so successful that basic, empirical facts apparently no longer count as ... facts. Instead, the AP’s fact checkers counter Ron Paul’s easily verifiable claims with the usual pro-TARP propaganda. Most of us blogging folk have day jobs. For the AP's Dina Cappiello, Ricardo Alonso-Zaldivar, Tom Raum, Nancy Benac, Jim Drinkard, Bradley Klapper and Christopher S. Rugaber, checking facts IS their day job. Here’s the relevant excerpt:
RON PAUL: "We have dumped the debt on the American people through TARP funding as well as the Federal Reserve. So the debt is dumped onto people. And what did we do? We bailed out the people that were benefiting during the formation of the bubble. So as long as we do that, we're not going to have economic growth."
THE FACTS: The $700 billion Troubled Asset Relief Program was proposed by President George W. Bush and passed by Congress in 2008 to help rescue banks and other imperiled financial institutions. Nearly all of the money has been paid back, with interest.
Most economists credit the program with keeping the financial system from freezing up and helping to prevent the worst recession in 30 years from becoming another Great Depression. The Federal Reserve does not operate on taxpayer money and does not receive any operating funds from the Treasury. In fact, it makes money every year from its banking operations, and turns over profits to the Treasury.
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Associated Press writers Dina Cappiello, Ricardo Alonso-Zaldivar, Tom Raum, Nancy Benac, Jim Drinkard, Bradley Klapper and Christopher S. Rugaber contributed to this report.
The key point here is that the AP writers claim as “FACT” that “[n]early all of the [TARP] money has been paid back, with interest.” This is the zombie lie that just won’t die. I suspect that none of the writers who worked on this report bothered to look at the Treasury’s Daily TARP Update, but had they done so they would have noted the following:
1. $413B was actually disbursed through TARP. Of that total, $121B remains outstanding. In other words, nearly 30% of the TARP funds disbursed have NOT been paid back. There isn’t a creditor on earth, least of all the banks who were bailed out with TARP funds, who would consider 70% as roughly equivalent to “nearly all of the money.”
2. Second, while the major banks and investment banks have paid back the TARP funds they borrowed, as of today AIG still owes $50B. Of course, the money the government injected into AIG went right out the back door to the very same banks that had been bailed out by TARP. Not that it ever stops the bailout apologists, but to exclude AIG from the bank bailout totals would be egregiously misleading. So, of the $313B disbursed to AIG and the banks, $67B remains outstanding ($50B from AIG plus $17B from the bank program itself). That’s 21% of the total that has not been repaid. Let me repeat that: 21% has not been repaid. Again, what creditor would refer to a 79% repayment rate as equivalent to “nearly all of the money”? Note that this 79% figure is just for the bailout of the banks. The home mortgage assistance programs and the auto bailouts are not included in my calculations here in any way. (And by “calculations,” I literally mean reading the numbers off Treasury’s spread sheet and punching them into the calculator – is there a reason why the AP’s reporters can’t do this?).
3. Third, the $67B still owed by AIG and a handful of banks is almost exactly double the $33B in “interest” and other income (e.g. from the sale of warrants) earned on the bank bailout program. This fact slightly complicates the AP’s suggestion that the bank bailout was somehow profitable (i.e. “paid back, with interest”).
To recapitulate, Ron Paul correctly points out that bank losses have been dumped on the American taxpayer, in part through TARP. The AP’s “fact checkers” claim, on the other hand, that “[n]early all of the money has been paid back, with interest.” Now, the AP is free to use whatever language it wants to describe TARP, but when the money you are still owed ($121B for all of TARP; $67B for just the Wall St. bailout) is more than twice your income on the loan ($40B for all of TARP; $33B for the Wall St. bailout) you are still very much in the red, my friends. You have not, in any commonly understood sense, been paid back nearly all your money, with interest – but that’s precisely what TARP’s apologists would have us believe.
As a side note, what sort of “fact check” cites personal opinions as arbiters of fact? Ironically, the fact checkers cite the opinion of “most economists” regarding the effectiveness of TARP – yet “most economists” are pseudo-free-market ideologues who were totally blindsided by the credit crisis which ostensibly made TARP necessary. Indeed, before 2008 most mainstream economists were openly dismissive of people like Nouriel Roubini, Raghuram Rajan and (yes) Ron Paul, who warned of growing risks within the financial system. To cite the opinions of “most economists” at this point seems willfully perverse in a piece purporting to be a “fact check.”
In any case, the fact checkers’ final point, that the Fed turns over a “profit” to the Treasury every year and that this somehow negates Ron Paul’s criticism of the bailouts, is just ludicrous. The Fed may have earned $81B in “profit” in 2010 and turned over $78B to the US Treasury, but over $76B of that was interest earned on Treasuries and Agency debt. In other words, almost all of the money (or “profit”) that the Fed turned over to the US Treasury came directly from the US Treasury – or its heavily-subsidized stepchildren, Fannie Mae and Freddie Mac. Treasury essentially recycled its own funds, while allowing the Fed to first skim off approximately $3B to pay for the bare essentials. The oddities of Fed-Treasury accounting have absolutely no bearing on whether taxpayers continue to bear the brunt of the banks’ massive losses. (They do.)
Finally, any economist who believes that TARP kept the financial system together simply doesn’t know the facts. The fact is, that the TARP program didn’t even do the things it is now hailed for having done – like keeping the credit markets from shutting down. Most of the things TARP is credited with were accomplished by the Fed or by summary guarantees announced by the Treasury, either before or immediately after the passage of TARP. As we wrote last year in response to similar inanities from auto czar Steve Rattner:
[L]et's be clear about the alternatives to TARP. These alternatives are not the result of Monday-morning quarterbacking. They were proffered during the crisis period, before TARP was even voted on. See here and here.
And how do we know that some of the alternatives to TARP would have actually been feasible and effective during the crisis period? Because some of these alternatives were already being put into use by the Fed and Treasury at the time!
- The Treasury, for example, stopped Paul Kanjorski’s fabled “electronic run” on the money market funds by issuing a blanket guarantee of all money market funds on September 19 – before TARP was even passed.
- The Fed announced that it would intervene in the commercial paper market on October 7 – just four days after TARP was passed ....
- Further, the Fed stepped up its activity under the TAF (Term Asset Facility) to $600-700B per month in the crisis period. Along with its intervention in the CP market, the TAF was used to both supplement and reinforce the inter-bank lending market.
- As for Rattner's claim that AIG would have failed without TARP, this is demonstrably untrue. On September 17, AIG had already begun sucking tons of cash from a lending facility the Fed had set up the day before. TARP had nothing to do with it. At that time, TARP was nothing more than a few jots and tittles in Hank Paulson's panic-addled brain.
- Though the TARP bill raised the FDIC limit to $250K, new legislation wasn’t needed for the FDIC to do so, or even for the FDIC to guarantee all bank deposits under a systemic risk exception – something which Bair, Paulson, et al. declared almost immediately after the bill was passed. There was almost zero risk at this point of a depositor-led bank run, and the actions taken by the FDIC here could have been accomplished just the same whether it came as part of the total TARP legislation or not.
- The same is true of FDIC guarantees of all bank creditors. Under the systemic risk exception, the FDIC was authorized to do this without anything that came in the TARP legislation. Part of this guarantee was achieved through the needlessly convoluted TLGP (Temporary Liquidity Guarantee Program), but the effect of the guarantees were the same and had nothing to do with toxic asset purchases or bank equity infusions through TARP.
It was this set of programs, and not the idiocy of TARP, that calmed the waters and kept the credit markets functioning through the crisis period. What were the effects of TARP? Well, what was billed as an asset purchase program quickly turned, as we all know, into an equity purchase program, neither of which scheme had any chance of calming the markets. On the balance-sheet level, TARP added capital, but it did so in the form of preferred shares that came with a hefty dividend AND restrictions on executive pay. In other words, bank executives had two very good reasons to get rid of the TARP cash as soon as possible. Thus, TARP funds were never seen as permanent or long-term additions to the banks' capital and so it likely had a negative, rather than a positive, effect on bank lending into the real economy.
Instead of buying preferred shares in the banks in order to shore up capital levels, the same effect (or better, in fact) could have been achieved, at least for regulatory purposes, by repealing FAS 157 (mark-to-market accounting). This was not news to the architects of TARP, because the suggestion had been made loudly and frequently throughout 2008. Of course, mark-to-market was repealed, but not until more than six months later. If TARP really saved the banks and the financial system, then why go to the trouble in the spring of 2009 of repealing mark-to-market?
Besides its balance-sheet effects, TARP also had a profound psychological effect. Contrary to what the apologists claim, anyone who cares to remember knows that TARP did the very opposite of inspire confidence. TARP scared the bejesus out of people! People who had no idea there were problems (Joe Six-Pack) were suddenly told that the world was about to end. Meanwhile, people who knew there were problems suddenly wondered if they weren’t 10 times worse than they previously imagined. Because why, they wondered, would Bernanke and Paulson be running around like panic-stricken Cassandra's, unless the world really was about to end? Bernanke and Paulson were telling everyone they spoke to that the entire world economy was on the verge of collapse and that there would be martial law and tanks in the streets if TARP failed to pass. Yes, as you can imagine, this did wonders to inspire confidence.
TARP apologists also like to point out that the major indexes fell sharply when the first TARP vote failed. Need they be reminded of what happened in the weeks and months after TARP was passed? The major indexes were nearly cut in half. And TARP did what to calm the markets?
The ultimate effect of TARP was to make it next to impossible to resolve or restructure Citi or Bank of America, for example, once the panic had subsided. Rather than play extend-and-pretend in 2009, we could have restructured some of these failed institutions. Instead, calls to break up or restructure the banks were met with cries that we would lose our taxpayer funded "investment" through TARP. Whether intentional or not, the equity stakes from TARP had the effect of making it politically difficult, though not impossible, to do anything other than keep the bailouts going.
Because of the political entanglement from the equity stakes, there is another large and hidden cost associated with TARP. By design, the main drivers of bank earnings over the past two years have been the Fed's zero-interest rate policy (ZIRP) and a steep yield curve. Because Bernanke and Geithner chose to play extend-and-pretend, rather than take decisive action to kill the zombies, banks have been able to "earn" their way to repaying TARP at the direct expense of savers and pension funds. Bank CD's, which many retirees depend on for safe interest income, and government bonds, which many pension funds are required to invest in, return a paltry 1-2% in the short to medium term and less than 4% in the long term. ZIRP has deprived ordinary people of hundreds of billions of dollars in interest income each of the last two years – all so that banks can "earn" the money to pay us back.
In conclusion, those who want to claim TARP was a great "success" give the program credit where none is due, and ignore all the costs beyond its nominal price tag.
The zombie lies about the success and necessity of TARP simply will not die. While there are a number of moving parts to the bank bailouts, and while the Fed and Treasury’s three-card monte doesn’t make things any easier to get a handle on, one would think that professional journalists could at least get their basic facts straight – certainly when hailing their piece as a “fact check."