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Were the Recession Era Bail-Outs Worthwhile?

This article was written by in Economy. 6 comments.


The Treasury Department of the United States has released its latest analysis of the various bail-outs enacted during this and the previous Presidential Administration, and not surprisingly, the outlook is good. The government frames the analysis of its own policies in terms of investment return. The Troubled Asset Relief Program (TARP) housing programs and the conservatorship of Fannie Mae and Freddie Mac will account for significant losses for the American taxpayer, but according to the analysis, these losses are more than offset by expected “Federal Reserve excess earnings” of $179 billion through 2015 as well as by expected gains from the government’s investment in AIG and the Treasury’s Mortgage Backed Securities Purchase program.

This accounting seems a bit sketchy, and the issue was raised by Gretchen Morgensen at the New York Times. The analysis neglected an important aspect: costs versus benefits. A cost-benefit analysis would help inform taxpayers whether the series of bailouts constituted an effective approach. Focusing on return of “investment” — whether these programs made money for the American taxpayer — is the wrong approach to analysis. The goal was not to make money, but to prevent the economy from collapsing.

AIGThat safety net can only come with a cost, and that cost might not be apparent. You can easily hide costs in an analysis that ignores the effect of an increased money supply as well as the missed opportunity to invest the same money elsewhere (opportunity cost). A cost-benefit analysis furthermore needs to accept certain assumptions about what might have happened to the economy of the United States had the government allowed entire industries to collapse.

It’s not difficult to use selected financial information to indicate the taxpayer bailouts will break even or possibly result in some kind of profit, and the desire to couch the success of any endeavor in the financial return is the result of a capitalistic society. Bailouts, however, are in effect a socialistic (societal) approach to capitalism: all taxpayers chip in to help selected industries, for the Greater Good of the economy, and you can’t measure social (societal) programs in capitalistic terms such as “return on investment.” You can look at the outcome, in this case, an economy that has been improving despite high unemployment, and compare that with the likely outcomes that would exist if the bailouts were not initiated. That’s a hypothetical situation that economists will never agree upon.

The idea that the bailouts need to earn money for themselves seems to be a way to placate those who need an excuse for the expenditures within a frame of capitalism. This analysis is saying that both the Republicans and Democrats, all generally agreed on the flurry of bailout programs, are justified in approving these measures, but the justification only works when there aren’t significant holes in the financial analysis. It’s better to justify the bailouts by pointing out the overall health of the economy compared to likely alternative scenarios while admitting this benefit to all came at a cost to taxpayers.

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New York Times, United States Treasury Department

Published or updated May 29, 2012. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 6 comments… read them below or add one }

avatar Money Beagle

I think that the auto bailouts were well worth it. I agree that the financial industry needed intervention to prevent a full out collapse of the lending and banking system, but I think it should have been a much more directed assistance program. They basically threw as much money at the banks as they were asked to, with minimal oversight and no discretion on what those funds would actually be used for. It should have been a much smaller amount that targeted specific portions of the banks, and had more oversight than they did. Everybody just looked stupid when the outrage came out about how bailout money paid hundreds of millions of dollars in executive bonuses.

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avatar jim

First of all its impossible to say what would have happened if we didn’t do the bailouts so that alone makes it impossible to say how well the bailouts worked. If we hadn’t done the bailouts we could be in a depression right now or maybe it wouldn’t have mattered much.

If you ignore the ‘what if’ scenario and just look at what we got out of the bailouts then its hard to get analysis of government spending that isn’t skewed by peoples political bias. People for or against government programs in general will make the argument with biased viewpoint and use a biased analysis.

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avatar qixx ♦1,895 (Half-Dollar)

I think one big what-if nobody wants to look at is “What if the economy would have recovered faster without any bailouts?” i think the real reason politicians at least don’t want to talk about what ifs is because there are too many to discuss and a what if might just convince people that your fix was a mistake.

The reason what-if are useless for the rest of us is because most of of can’t change the scenarios. All we can do is focus on our own personal outcomes. If you are better off now than when the bailouts started then they were a success. If you are not then they were a failure. While it may not be plain or simple and may be overly simplified your personal situation should be what matters most to you.

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avatar William @ Drop Dead Money

Remember the Resolution Trust Company of the 90s? They ended up breaking even and disbanding. I think TARP might end there too once the dust has settled.

The key to this success is nobody but the Government has the money to buy all the distressed assets when their prices are in the toilet. But, prices never stay down. They come up again. All one needs is a vehicle to buy them low and sell them once prices have recovered.

If I had enough money, that’s what I would love to do. And on a small scale I did.

This is one of those very rare moments of government sanity. Only it takes several years for that to become evident. Years in politics are like millennia for mortals.

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avatar Luke Landes ♦127,500 (Platinum)

Ah, but with the election cycle, the public is forced to judge the merits of programs often much too soon. Long-term projects, particularly those that are designed to lose money for years before showing their true benefits, are troublesome for politicians because they’ll be voted out and their initiatives will be defunded before there is an opportunity for the programs to work. People — taxpayers or shareholders — are interested in short-term results and profits, often at the expense of the long-term greater good.

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avatar William @ Drop Dead Money

Oh, I hear you! This is undoubtedly part of a greater malaise in our society – too much concern for the short term.

Fortunately, those who keep their eye on the long term end up with less competition, which makes their goals easier to reach. Example; someone who refrained from refinancing or buying a house at the top of the market didn’t get caught in the housing crash. Or someone who decided to forgo a 10% raise by picking a job with a recession proof employer ended up cruising through the recession.

All of us are stuck with the politicos who have only one goal in mind these days: get re-elected. In the old days, serving was a sacrifice, and many politicians never ran for re-election, having done their duty to their country. Somewhere along the road the rewards grew to exceed the sacrifice, and that’s when politicians’ focus shifted from service to getting more rewards… from getting re-elected.

All we can do, it seems, is manage our little cabbage patch because in every mismanaged circumstance there is opportunity for individuals. The trick is finding those and having some spare resources to exploit them. :)

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