Forum Post: TARP (the bailout) was a loan, not free money.
Posted 13 years ago on Oct. 7, 2011, 10:19 p.m. EST by skeplitics
(0)
from Somerville, NJ
This content is user submitted and not an official statement
And the cost of the program is estimated at well under 100 billion dollars now, not 700. Furthermore, unemployment insurance extensions cost 10 billion dollars every 30 days roughly and they have been extended essentially indefinitely for years now, costing us a lot more.
This whole notion of the government only serving corporations and not the people is out of touch with reality.
Let me understand your point of view: you are saying we should identify losers in a free market economy, and having picked these losers, we bail them out with tax payers money so they do not have to be responsible for their decisions and actions.
This is a very massive government intrusion into and distortion of the free market. At one point the government was the single biggest shareholder of many of these too-big-to-fails and in the case of AIG, the majority shareholder.
What free market? Clearly you're not talking about the USA.
Dear government and Federal Reserve:
Stop distorting price signals and cost of credit. Where the fuck is equilibrium? Wherever the government decides it is I suppose, free market my ass.
Real talk. What is the op even getting at?
The OP is pointing out that while people continually namedrop TARP as free money being thrown at banks for no reason other than to keep them from collapsing, it's somewhat more complicated than that. Which it is, even though I dislike TARP and objected to it when it was proposed.
this makes no sense to me
the numbers don't mean anything
The idea that TARP is re-paid and everything is OK is akin to having cancer and the doctor telling you to take two aspirin and call him in the morning. Well, how do you feel, all cured? That is out of touch with reality and oversimplifying a complex problem. I would get a second opinion.
Some misconceptions here (on this website in general) that I will try to clear up.
As the OP has stated, TARP is almost completely paid back. In fact, there is less than $30 billion still outstanding - stemming from GM and AIG (a government entity today) and the US Treasury estimates that it will eventually make an 8% gain. Considering that the US5yr is currently yielding 1.08%, that's a pretty great return for US taxpayers.
$16 Trillion is a number often referenced as the total bailout given to banks. This is the sum of all loans given out over a long length of time to banks from the Fed. Large banks have thousands of loans (Assets to the bank) maturing and deposits withdrawn (Liabilities to the bank) everyday. Sometimes, this activity does not net to zero and a particular bank is not able to meet the 10% reserve requirement of deposits at the Fed. Typically, the bank would seek to just borrow overnight money from another large bank that had a surplus reserve but the crisis escalated to the point that banks were unwilling to lend to each other out of fear of never getting repaid. Thus, the Fed stepped in to make multiple large but very short term loans that were trued up the next day. Had they not done this, we would have been much worse off today.
The Fed's actual purpose is 1. To create price stability and 2. To be the lender of last resort to banks. What it did during the Debt Crisis is completely consistent with its intended purpose. Furthermore, the Fed is actual capitalized through the aggregate of all US banks' reserve deposits. In other words, the Fed has money from the banks in the first place.
The Fed does not literally print money. The treasury print's the actual bills, which it then gives to the Fed. The Fed injects this into the economy through Open Market Operations. Meaning, it goes into the marketplace and buys various duration US government debt (T-bills and bonds). This may sound like the Fed gets free money but please keep in mind that the Fed is a quasi-government entity and is required to give all of its profit to the Treasury. So essentially, it's a clean swap, accounting wise, an exchange of US bonds for dollars.
Money multiplier and velocity of money. I see these terms used incorrectly all of the time. Money multiplies because every time someone makes a $100 deposit at the bank (surplus cash in the economy), the bank deposits the required 10% reserve at the Fed and reallocates the remaining $90 surplus to loans to people and businesses. The $90 ends up at another bank after it is spent by the people/business and that bank is now required to make a 10%, or $9, deposit at the Fed and free to make an $81 loan. This goes on until there is no more money left to loan. The end result with a 10% reserve requirement, $900 is created in the economy and $100 is held at the Fed.
The Fed is a quasi-government entity. Yes, they operate independently - and for a reason. Have you noticed how politicians spend money? Economics/Money Supply and Politicians should be kept as far away as possible. Can you imagine the swings in Fed policy as different parties get elected? Anyways, the Fed's Board of Governors are appointed by the POTUS. Additionally, there are a number of layers of additional personnel including banking representatives and representatives from all of the major industries in the US.
They don't literally print paper currency, but the Fed does fabricate money out of thin air. They punch in numbers into a computer and boom, they have money they then use to buy via Open Market Operations. They have pumped trillions of dollars into the banks using this method, and in exchange got treasury bonds as well as toxic assets like mortgage backed securities.
The Fed buying treasuries is actually sort of a good thing because they don't collect interest from the US Treasury on those bonds, so it's effectively retiring that debt. The downside is they increase the amount of cash out there which in theory increases inflation, but the problem that inflation can take place this year, or 20 years from now. Right now the cash is being sat upon so it hasn't been triggering inflation yet. But at least our deficit problem gets resolved slightly.
The upside to inflation, if you want to look at it that way, is it also eats away the value of our debt. So we pay back our debt with dollars that are less valuable. The problem is that it also erodes the wealth of our own citizens since we have a hard time finding any investment that can earn interest at a higher rate than inflation.
In response to your first point - What my problem with it is that the federal government allowed banks to take a calculated risk with the taxpayers money in efforts to prevent their collapse. And we should be ok with it because "oh we might get 1% return!" - once we start allowing this sort of behavior it will degrade to riskier decisions and sooner or later, as history has proven, it will be a huge disaster.
I agree that having the Federal Government help private businesses through loans is not a good habit. Helping companies that are failing due to their own bad management creates moral hazard which can come back to bite us down the road. But I don't think this was an easy decision for anyone. People, for various reasons, became unable to meet their debt obligations. Because banks need to borrow to and from each other daily, the issue was that many banks that were in good standing (including JPMorgan) were susceptible to the whole sector grinding to a halt. It was a domino effect. It was not for a return (the Treasury estimates to be paid back with an 8% profit, btw). The alternative to making loans which stopped the systematic failure, would have been a total financial sector failure which would have sent, not ripples but tidal waves through the economy. One of the government's main functions is to support a functioning banking sector.
Yes, this "loan" agreement worked out quite well for the UAW at GM. It didn't work out so well for the bondholders, though. It won't work out well for the taxpayer either.
GM alone is $100 million liability, and that's assuming he Volt sells well. In my opinion, your numbers aren't even close.
I'd like to point out to you that, I agree with your argument, that being that unemployment insurance is likely costing more than pretty much anything at present.
What's worth considering is why is this the case? Why do so many people not have jobs? It's because their positions are all outsourced and/or no longer necessary. Tech has advanced to the point where we as human beings are now irrelevant and outdated.
So what would you propose? Because the alternative is simply allowing a third of the population of the US to die in the streets. Would that solve the problem? Yes, it would. But it's neither humane nor ethical to simply handwave that as unimportant.
It is also disputable that bailing out the banks in question was a positive action. Something being "too big to let fail" is a sign that our country is too reliant on it, and it may well be better to allow it to fail and rebuild on the ruins than struggle to bail a sinking ship with a thimble instead of trying to patch the holes or head to the lifeboats.
It is the military and the various Federal policing operations that are costing more than anything else right now. Not unemployment benefits.
Not actually true. Social programs cost the government a great deal more than other federal programs. Things like Unemployment, Medicare, etc.
These things are necessary, and I'm not suggesting they should be cut or anything. I am, however, pointing out that the problem is drastically more systemic than it looks at first glance and our problem is our entire financial system is cancerous, not what we're spending our money on.
Yeah, actually it is true. Here, check your facts:
http://www.usgovernmentspending.com/us_budget_pie_chart
Citing your own source: Healthcare(which includes things for low income families who cannot afford insurance themselves) and welfare itself account for 29% of government spending. Defense and Protection together are only 21%.
Where are you looking? At the Federal level, defense is 25% of the budget and the biggest slice of the pie plus something called "protection" which is 2% of the pie for a total of 27%.
After that is "health care' at 21% and if you drill down you find out that most of that "health care" slice is Medicare, which all workers have contributed to through a dedicated tax + premiums.
This discussion is about the US Treasury & bailouts and Federal is the only coffer we ALL pay into so that's the data that matters.
Just because workers contribute to it doesn't make it irrelevant. It's still money coming out of peoples' pockets and going into government programs.
Welfare and Healthcare together are 36% at the federal level to the 27% you mentioned(my previous numbers were at the total level, not federal), which is still about the same difference as my previous numbers.
What? "Coming out of people's pockets and going into government programs" Do you plan to collect your social security when you retire? Are your parents or grandparents collecting it now and using Medicare? You pay in and you get it back. It's not some "government freebie".
Anyone who expects to collect social security when they retire has no comprehension of how totally incapable of payout that system is now.
If the government goes and runs out of money then that means that "getting back" isn't going to happen, because the government spent it on other things.
Same reason why the banks had to be bailed out. They allocated money they didn't actually have.
Social security is solvent through 2036 to 2041 Planning beyond that needs to be done but it is not in any way as dire as some would have us believe.
That's its present number, yes. But considering our spending deficit I doubt it is going to remain at that state without the government having to tap into it for other things.
Um, no. There were all manner of grants given to the banks. This did in fact include loans, made at 0% interest.
Notice, the banks lend money to you and me at a rate of around 4% interest. So, if you are talking about the loan portion of the bailout, you are missing the point.
The banks take money from taxpayers at 0% interest and lend it back to them at 4% interest. In between, the top executives of banks--including banks that have failed due to reckless mismanagement--pay themselves in massive cash bonuses.
Is that a rational or fair system?
I'm not sure what you mean by cost of the program. There is over 200 billion still outstanding:
http://projects.propublica.org/bailout/main/summary
You are operating under the assumption that TARP is synonymous with the bailout, but it's not, TARP is an extremely small piece of the bailout.
This is what happened with TARP, not so bad:
"The Treasury ended up disbursing $245 billion in bank investments, and $244 billion has been repaid. It currently estimates that these specific programs under TARP will yield $20 billion in profit to taxpayers. But, including foreclosure prevention and other initiatives, TARP will cost taxpayers roughly $25 billion, according to the Congressional Budget Office."
OK, so what about the $16+ trillion dollars the Fed loaned to US and foreign financial institutions as per the recent Federal Reserve audit? QE programs used to buoy asset prices which have been shown to increase wealth disparity? ZIRP which is essentially an indirect bank subsidy? Debt monetization? TALF? The Fed's Emergency Liquidity programs? $182 billion bailout of AIG? The unlimited credit line thrown to Freddie and Fannie? By the way, printing money for all of these things without a subsequent increase in production decreases the value of every dollar in circulation, so they can steal from us that way, which is nice.
The government support to the financial industry (and others, green, auto, etc) continues.
End it now.
There was never 16 trillion in loans made. You have clearly never read the audit. sheesh
Winnebago has the figure of 16.1 trillion from GAO. We can assume that's right.
GAO reported 16 trillion. Some recipients:
it did "say" that but read further. The devil is in the details. sheesh
a lending window exits for over nights to provide inter bank liquidity. these weren't free funds. this was done to provide liquidity. Don't you remember LIBOR going through the roof and the entire lending spigot being shut off for a few days?
There was no free money that got jammed into some CEO's pocket on this one.
Usually you guys are spot on but on this one you are dead wrong.
It makes you sound like a 9-11 denier or that we faked the moon landing
What part about "The U.S. Federal Reserve gave out $16.1 trillion in emergency loans to U.S. and foreign financial institutions between Dec. 1, 2007 and July 21, 2010, according to figures produced by the government’s first-ever audit of the central bank" did I misconstrue here? http://tiny.cc/c9cb6
Unless you were being satirical =)
You misunderstood... First off you can't loan what you don't have and the Fed can't loan money it doesn't have. If you read the results of the Bloomberg v Fed Court Case you will see the number was closer to 1.2 trillion in "dodgy loans" most of which have been paid back,... Here is how you are being mis lead by cardboard signs and catchy phrases. I can see how you would make the error but it just simply isn't true ...
No, you've misunderstood the figures.
The $16.1 trillion is the sum total in loans made throughout the period (see table on p.131 of the report), this isn't a total amount loaned out at one time. Most of this is in very short term, either 28 days or overnight loans. The Fed constantly loans money out that's repaid the next day.
That's because banks operate on a system called fractional reserve banking, which to put it simply means they lend out money that they don't actually have upto a multiple of whatever their true holdings are deemed to be. In the U.S and E.U they must adhere to this money multiplier but they are allowed to exceed this during trading hours, as long as the books are balanced by close of business.
This means that from day to day these banks may need to get their hands on dollars that they don't have immediately at hand. They often borrow from other banks but the Fed also provides a service to supply them through a short term (often just an overnight) loan. This money is immediately repaid to the Fed, and the availability of dollars is necessary for the dollar to remain a viable trading currency, which is why they are 0% interest.
It's done to avoid temporary reserve shortages at individual institutions from causing the world's dollar lending system to grind to a halt.
Not to mention most of these foreign institutions have American based credit default insurance anyway so it's ultimately in the U.S's interests to ensure there's no default, if you want to herp a derp.
It should be obvious that the story is bunk anyway as the Fed doesn't have $16 trillion to hand out. If the Fed had "secretly printed" and pumped $16 trillion dollars into general circulation the dollar's value would have tanked and I think we'd all have noticed.
There is a difference between the Fed printing money and the money entering circulation. One reason the inflationary effects of our recent monetary policies haven't been felt is the money is being held as excess reserves by the banks. http://tiny.cc/9pwu2
No it isn't. Where are you getting that from? Some off shoot of Ron Paul?
No, what I'm stating is factual. Just because money is created doesn't mean it is put into circulation. If a central bank creates money, the commercial banks can either lend it out OR hold it as excess reserves. When they hold the money as reserves, it does not circulate, rather it accues interest paid by the Treasury.
"There are two suggested mechanisms for how money creation occurs in a fractional-reserve banking system: either reserves are first injected by the central bank (MONEY CREATION), and then lent on by the commercial banks (MONEY GOES INTO CIRCULATION)"
The ratio is not always 1:1, as a matter of fact, it's significanatly less than 1 right now http://tiny.cc/jshj6
Which is where the concept of "pushing on a sting" derives http://tiny.cc/6uo0u
ruh roh someone has been reading their zerohedge blog. Look the majority of those loans were overnights or 8 hour loans. Please show me where this money is hiding in reserves on a bank balance sheet 3 years later and I will believe you and the coo coo from Vermont.
Methinks you should change your handle to, "outoftouchit".
No evidence. Don't understand the banking system. Me thinks doth protest too much. DING BAT