Saturday, November 20, 2010

The Cost and Benefits of Economic Rescue In This Week’s News

By Joshua K. Beecher, Guest Blogger

Editor's Note:  The first five posts in this blog focused on changes in the tax law that are currently scheduled to occur.  As this is a tax and money blog, we have invited Joshua K. Beecher to comment on money news of the past week, particularly as it relates to the current status of the cost and effectiveness of the economic stimulus and bailout activities.

This past week was an interesting one in terms of major figures in the financial world making very public statements.  Ben Bernanke, head of the Federal Reserve Bank, while in Germany this week, publicly defended the Fed’s decision to pump an additional $600 billion into the financial system by buying up U.S. Treasuries; claiming that the persistent high un-employment rate justified the action.  For those who follow finances at all know that this is a very unusual move for the Federal Reserve period, let alone its head.  Since when did it ever attempt to “publicly” explain their reasoning behind any decision?  And more importantly, since when did its head publicly call out China (and other emerging economies mind you) in regards to suppressing their currency value right in line with the White House’s administration?  Certainly another disturbing item that makes you wonder how politically neutral the Fed truly is.

As interesting as Mr. Bernanke’s speech was, even more interesting is the Op Ed piece that Mr. Warren Buffett wrote into the New York Times, and which they published this past Wednesday.  He goes on to praise the efforts of a litany of department heads: Fed Chairman Bernanke, Treasury Secretaries Henry Paulson and Tim Geithner, etc. stating that they acted with “courage and dispatch.”  No details were provided in his article on the costs and/or benefits of the government’s various rescue efforts, but it does make you wonder.  Is the true cost to U.S. taxpayers for the bailout the pittance they would have us believe?

One of the more interesting websites to check out on the topic is one entitled ProPublica (  On their site, you can track everything that has been paid out from the government to the various entities that have received assistance.  You can also track how much of that money has been paid back.  As of this very moment, a total of $546 billion has been spent, loaned or invested by the Government, and a total of $264 billion of that has been returned and paid to the Treasury as interest, dividends, fees or to repurchase their stock warrants.  This leaves $282 billion outstanding which is far less than the publicly touted cost of the Troubled Asset Relief Program (TARP) for banks which alone was supposed to cost $700 billion.  In addition, this figure is likely to come down even further as more banks continue to make repayments.

Earlier this spring, Mr. Geithner predicted that TARP (along with assistance for GM, Chrysler and homeowner’s facing foreclosure) would cost roughly $119 billion, once everything was paid back that would be repaid.  Fannie Mae and Freddie Mac would add an additional $85 billion, and with the government actually standing to make money on the Fed’s finance programs for the banks, to the tune of $115 billion, that left the government’s total rescue tab at a mere $89 billion.  Most would agree that this is a very small price to pay to avoid the financial Armageddon and collapse to which we were headed, but is this truly the end of the story?  It is incredibly difficult to have a full and exact accounting of the entire rescue effort given how wide spread the government’s efforts were, but I’d like to take a look at just a few of the intangibles that certainly paint the picture a little differently than what our Washington leaders (and those like Mr. Buffett) would have us believe.

First up is an interesting take from a New York Times financial columnist, Gretchen Morgenson, who back in April of this year began to question the numbers being touted by Treasury Secretary Tim Geithner and Co.  She points out that the Treasury’s numbers leave out the effects of the Fed’s near-zero interest rate policy, which of course was put into place originally to increase lending.  However, the fact of the matter is that it punishes investors and heaps mountainous profits and benefits on the banks.  Through this policy, the banks have been able to pay depositors next-to-nothing while taking that money and loaning it out.  Considering the fact that the average credit card rate in the nation is 14% you can see how the profits add up quickly.  There is no simple way to calculate a figure for this transfer of wealth to banks, but Morgenson calls it “enormous.”

Next let’s take a look at the overlooked losses the Federal Deposit Insurance Corp (FDIC) has accrued by taking on 43 failing banks this year alone.; total cost to the Insurance fund stands at $6.65 billion.  While that fund is financed by bank fees, what of the loss-sharing arrangements the FDIC was forced to make to convince healthy banks to buy up troubled assets from failing ones?  Christopher Whalen, the editor of the Institutional Risk Analyst (a weekly newsletter produced by Institutional Risk Analytics), expects to see that figure top $400 billion when all the dust settles and all is said and done.

And while we’re at it, let’s not stop there.  TARP was also designed to give the banks a reprieve and instant cash injection by changing long-standing accounting rules to allow them to maintain bad assets on their books at unrealistic levels (Mr. Whalen has labeled this provision as “extend and pretend.”)  This portion of TARP is still ongoing as of yet those toxic assets’ true value (and losses) have not been absorbed on the banks’ balance sheets.  This of course helps explain why many banks have been so hesitant to loan out any money, which in turn has prolonged the economic downturn.  As with all these “intangibles” there’s really no real way to calculate the total cost, but Mr. Whalen has said, “The refusal of the Washington political class to address the issue of bank insolvency quickly via restructuring and recapitalization has extended the economic recovery process by years.  Lending will continue to shrink and real economic activity is suffering. The cost of ‘extend and pretend’ goes into the trillions of dollars in lost economic activity.”

As stated earlier, there is no real way to put a dollar figure on the cost of the government’s actions to “rescue” our troubled and failing financial system; however, if for nothing else it is worth taking a second look at assessments provided by our government (and then intentionally praised by those in high esteem like Mr. Buffett) with the heavy dose of salt that they deserve.


•Warren Buffet’s Op Ed Piece in the New York Times:

•ProPublica’s tally on Government Bailout/Rescue Spending:

•Gretchen Morgenson’s article in the New York Times, 04/17/2010, questioning the Bailout was/is a bargain:

•Ben Bernanke’s defense of the Fed’s recent announcements and actions; including issuing a warning to China on its currency policies:

•Christopher Whalen’s Institutional Risk Analytics:

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Important Note!   The information in this article is intended to inform you of some of the financial opportunities provided in the tax laws or elsewhere.  These laws are very complex and thus this article is not intended to give you specific advice for your personal situation.  If you need such advice, please contact a qualified professional.

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© 2010, Joshua K. Beecher, all rights reserved. This article, either as a whole or in part, may not be reproduced or transmitted in any form without the prior written permission of the copyright holder. When such permission is granted, the user must state that the material was used by permission of the copyright holder.

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