The debate over the bailout of the US banking system has recently taken a weird turn.
It was one thing when we were arguing about whether the actions taken under TARP and the Federal Reserve's programs were prudent. (My own view has always been that recapitalizing banks with TARP was a huge mistake.) It's quite another to claim that, since all the money was repaid, the banks weren't really bailed out at all. They just took some loans from the government and repaid them.
Steven Randy Waldman at Interfludity has a must-read post that tears apart this argument.
After assuming the banking system’s downside risk, the US government engineered a wide variety of favorable circumstances that helped banks “earn” their way back to quasi-health. The government provided famous and obvious transfers like unwinding AIG swaps at 100¢ on the dollar.
It forced short-term yields to zero and created an environment in which medium-term interest rates would be capped for several years, granting banks a near-risk-free arbitrage for a while. It emitted trillions in excess reserves on which it continues to pay interest. It forewent investigations and prosecutions that by law it should actively pursue, and settled what enforcement it could not avoid for token fees. Then there are the things conspiracy theorists and cranks like me suspect but cannot prove: that the government and the Fed have been less than aggressive in minimizing their costs when they or entities they control (AIG, Fannie, Freddie) transact with large banks, that they have left money on the table where doing so could be hidden in arcane accounts or justified as ordinary transaction expenses and trading losses. Large banks have enjoyed some rather extraordinary results for allegedly efficient markets, quarters with large trading profits and no or very few losing days. Government housing policy is pretty overtly subject to a constraint that interventions must not provoke loss realizations for banks carrying bad loans at inflated values, or interfere with servicing revenues.
(If you think I am overconspiratorial, I’m still waiting for an innocent explanation of this, from 1991.)
Pulling back from a shell game whose details are, by design, labyrinthine, check out the big picture. Since the beginning of the 3rd quarter of 2008 (Lehman quarter), US debt held by the public increased by 84%, from $5.28T to $9.75T (as of the end of Q2 2011).
Depending on where you start, the growth rate of publicly held US debt prior to Q3 2008 had been ~8% per year (starting in 1970 or 1980) or ~4.5% (starting in 1990 or 2000). The growth rate since Q3-2008 has been 22.6% per year. The United States has issued between $3T and $4T more debt than would have been predicted by any reasonable estimate prior to the financial crisis. So far.
Go read the whole thing.
As Waldman says, if you believe all of this is costless to taxpayers, please ask your Congressman to cut me a check for a trillion dollars.
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