TARP's Success Proves Washington's Talent
The Treasury department announced a plan last week to begin selling the U.S. government's stake in AIG. The plan won't go into effect until next year but it's already causing a stir. At issue is how to value the preferred shares Treasury owns so the taxpayer can make money on its loan to the hobbled insurance giant. With $100 billion on the line, this is no academic discussion.
It seems as though the plan has set off a cascading recognition that the entire bailout from TARP to bottom, so to speak. TARP itself ended on Sunday. Neel Kashkari went on CNBC this morning to defend the program which has perversely become universally reviled.
The public estimation of TARP is at odds with every professional evaluation that sees the program might end up costing the government, and all of us, a lot less money than originally feared. The Financial Times summed up the situation over the weekend this way:
Most of the money invested in the likes of Citigroup and Bank of America has been recouped. A plausible exit strategy has been announced for AIG and General Motors, the insurer and carmaker that were two of the most controversial bail-outs, and Mr Geithner now says that the troubled asset relief programme should cost less than $50bn out of an original $700bn.Though we should acknowledge that some smart observers like Andy Kessler have warned that TARP's success will only be short-lived. Another downturn in the housing market could easily trigger more pain and panic.Lee Sachs, a former senior Treasury official who orchestrated the second part of the rescue, is more bullish still. "As a financial matter, is the result better than expected back in the depths of the crisis? Absolutely," he says. "I think the taxpayer at the end of the day will break even and may do better." [...]
Making a play on a famous MasterCard commercial, Mr Sachs outlines what the country got in return for its investments in the banks. "Dividends? Five per cent. Equity warrants? Two per cent. The economy not turning into the second Great Depression? Priceless."
Nonetheless, the idea that the Federal government not only got something right with the bailout but that it could even turn the rescue into a bit of a profit center is a bit of a stunner. Dan Gross showed in his new Yahoo! column that appeared last week that the Fed is making good money these days for the Treasury:
Over its lifetime, the Fed has funneled more than $680 billion into the coffers of the Treasury. Until recently, the figures were pretty steady and relatively small - between $20 billion and $30 billion from 2000 to 2008.Then, with the beginning of the bailouts, the Fed began to use its balance sheet as an instrument of policy. As a consequence of this policy, the Fed began to make a lot more money from its function as a bank, according to Gross:
The upshot: thanks to booming profits, the Fed transferred $47.4 billion in income to the Treasury last year, up 50 percent from 2008.Obviously, no one should view massive government bailouts as a growth industry or even as a solution to the very serious financial problems our state and Federal governments face. But the success of government intervention into the economy -- which runs counter to every aspect of our prevailing faith in economic libertarianism -- does suggest that Washington may be far more competent than we've been willing to admit for many, many years.
This runs counter to the central political theme of our time. Since the days of Ronald Reagan we've reflexively come to believe that government is not the solution to any of our problems. Even as we rely upon government more today than we did in the waning days of the Carter administration. That would be a wry irony if it weren't for wretched state of our political discourse. The growing influence of the Tea Party -- a movement that was provoked by TARP -- over the already economically unimaginative political process increases the antipathy to the very forces that saved the system.
The hypocrisy of the Tea Party movement is its incapacity to recognize this paradox or, worse, the conflicts that come closer to home for its supporters. One can see this in Matt Taibbi's overheated account of a Tea Party rally in Rolling Stone. Here he describes some of Rand Paul's supporters in Kentucky:
A hall full of elderly white people in Medicare-paid scooters, railing against government spending and imagining themselves revolutionaries as they cheer on the vice-presidential puppet hand-picked by the GOP establishment.The central paradox here is the railing against government spending from a position of government dependency and fomenting a revolt in favor of the status quo. That sort of confusion is exactly what enabled the credit bubble to inflate without being checked.
Now some political commentators are beginning to admit that only way to manage some of our most intractable problems is to rely on either anti-democratic institutions like the Fed or upon moments of terror that allow government to function. Fareed Zakaria went so far as to suggest that the fall of Lehman Brothers provided the necessary chaos to "shock the political system into action."
From the autumn of 2008 through a good part of 2009, a sort of financial martial law was declared in the US. Congress essentially stepped aside and gave the Treasury department and the Fed a free hand to save the country. The massive, flexible intervention provided by the TARP was anything but democratic. But it did show what government actors are capable of when freed from the constraints of political oversight. Which suggests that the paralysis that has crept back into the system may only be resolved by yet another crisis.
Image of Tea Party protestor courtesy of Fibonacci Blue via Flickr