Was TARP Good for the Taxpayers?

By Robert MurphyLately there has been a growing campaign to tout the success of TARP,
Henry Paulson’s extremely controversial plan to use (originally) $700
billion of taxpayer money to save the financial system. Despite this
chorus of praise, the TARP bailout was a terrible idea that will cost
taxpayers both directly and indirectly through its perverse incentives.

The Politics of TARP

Probably more than any other issue, the pundits’ handling of TARP
has been extremely political. There were many right-wing analysts who
were for the bailout when Bush Treasury Secretary Hank Paulson proposed
it in September 2008, and yet these supporters mysteriously became some
of the fiercest TARP critics after Obama was in the White House. (Glenn Beck is
the most obvious example, but there were others.)
On the other hand, I can’t help but think that at least some of
the left-wing analysts who are currently singing the praises of TARP
would be singing a different tune had John McCain won the election. We
can’t know what would have happened in that alternate timeline, but I’m
guessing many of these progressive bloggers would have excoriated the
Republican bailouts of their fat-cat banker friends. (In fairness, Matt
and Paul
have been consistent — they were for TARP, with caveats,
from the beginning!)
Say what you will about Austrian libertarians, we are a pretty
consistent bunch, who heap scorn upon massive expansions of government
power — whether in economic, social, or military arenas — regardless
the party in power. For example, on these very pages I described TARP
way back when as “The Great Bank
Robbery of 2008.”

Did Taxpayers Make Money on TARP?

In mid-September Matt Yglesias perfectly
summed up
the verdict being crystallized among interventionists in
the blogosphere regarding TARP:

More opinion leaders really have an obligation to point out that
TARP, the Troubled Asset Relief Program, looks set to go down in
history as one of the most unfairly maligned policy initiatives of all
time. The government took hundreds of billion dollars, gave it to
banksters, and in exchange all we got was this lousy
$7 billion in profit
. Which is to say that even if TARP had no
positive impact on the economy whatsoever, it had a negative
cost to taxpayers. How many programs can you say that about? And how
many of them are toxically unpopular?

The interesting thing here is that if you follow
the link
Yglesias himself provides, it is to a CNN Money article
from last March with the headline, “Price Tag of TARP Bailout: $109
Billion.” Now Austrian economists are famous for eschewing complex
math, but even we can tell that $109 billion is larger than
negative $7 billion.

If we dig into the article, we see where Yglesias came up with the
claim that TARP “had a negative cost to taxpayers”:

The government’s unprecedented $700 billion economic bailout
will actually cost taxpayers just 16% of that total, according to a
Congressional Budget Office report released Wednesday.
The Treasury’s losses on the Troubled Asset Relief Program
(TARP) will total $109 billion over the program’s lifetime, CBO latest
estimates [made back in March 2010] show.
TARP’s two big moneysuckers are AIG and the auto industry.
AIG got TARP money in two forms: the government bought $40
billion in preferred stock and created a $30 billion line of credit for
the company. CBO previously estimated the AIG bailout would cost the
government $9 billion, but AIG hasn’t paid the Treasury the quarterly
dividends it owes. AIG’s weak financial position prompted CBO to
increase its loss projection to $36 billion — more than half of the
bailout cost.
Other major losses — a total of $34 billion — will come from
TARP assistance to the automotive industry, CBO said. The government
committed $85 billion to bailing out the automakers.
On the flip slide, the highly unpopular capital infusion for
banks will actually net
the government
$7 billion, CBO expects — even including a $2
billion loss
from CIT Group — which declared bankruptcy, and
Pacific Coast National Bancorp, which was taken over by the Federal
Deposit Insurance Corporation.

So let’s be clear: When proponents say TARP “made money,” they are
narrowly referring to the infusion of funds into banks. The taxpayers
have still lost money on the entire deal, because the slight profits on
the bank investments have been dwarfed by the injections into AIG and
the auto industry.
But even if we focus on the capital infusions into banks, it’s
hard to see how the Treasury made a good investment, or netted the
taxpayers money.
First of all, the TARP plan was reconfigured almost the moment
Paulson got his authorization. It was originally sold as a plan to buy
troubled assets
— hence the name of the plan. After Paulson got
$700 billion ransom payment, he instead decided to use the money not
to buy mortgage-backed securities, but instead to acquire partial
government ownership of major banks.
It’s important to point out that at least some of these capital
injections were offers that the executives couldn’t refuse. We can
never know exactly what went on in that room, but it seems likely that
the strongest banks — which would look relatively healthy to markets
they had had the option to refuse a taxpayer bailout — were muscled
into accepting packages by the Treasury Secretary.
This is an important difference. When TARP was first implemented,
free-market economists were asking, “If these purchases of preferred
bank stocks are such a good investment, why aren’t people in the
private sector putting up the money?” Yet private investors may not
have had the option of acquiring some of the deals that Paulson was
able to finesse with his privileged position.

Another important point is the risk involved. Just because
an investment pays off in retrospect, doesn’t mean it was a good idea
all along. For example, if the United States Treasury offers loan
guarantees to a shaky third-world government, in order to induce banks
to accept its bonds, it may turn out not to “cost” the taxpayers
anything. But it would be wrong to say such a loan guarantee had really
been “costless,” because in the event of a default, the taxpayers would
have been on the hook.
A similar analysis holds for TARP. At least for the banks in the
worst shape, they received generous terms from the Treasury. In other
words, the Treasury infused capital into these banks at a risk of loss
higher than private investors would have tolerated. The mere fact that
this gamble didn’t blow up in their faces doesn’t prove it was a good

The Role of the Fed

The role of the Federal Reserve is even more important than the
above points. Under Ben Bernanke’s leadership, and in coordination with
then-New York Fed President Timothy Geithner, the Fed expanded its
balance sheet by more than a trillion dollars in late 2008, relieving
the banks of their bad assets through various purchases and other deals
on terms that no private hedge fund would have offered:

Figure 1

Federal Reserve Balance Sheet (source)

So although the Treasury may have “made money” on a certain
category of the TARP investments, this is hardly a boon to the
taxpayer, because some (possibly all) of the major banks were propped
up by the Fed’s money creation. If this is success, then let’s cut out
the middleman. The Fed can simply print up $10,000 in new bills and
mail them to every taxpayer. Woo hoo! We’d each make $10,000 on that
deal, after subtracting out the Post Office’s cut.
Dean Baker, a Keynesian economist who nonetheless can smell a rat, couldn’t
that the New York Times couldn’t find any critics of TARP
in its congratulatory write-up. Baker explained,

[If the NYT had found some critics], and they talked to them for their
article on the end of the TARP
, the critics likely would have told
the NYT that the TARP preserved Wall Street as we know it. Had the
market been allowed to do its magic, Citigroup, Goldman Sachs, Morgan
Stanley, Bank of America, and many other fine institutions would have
been bankrupt. This would have redistributed more than a trillion
dollars of wealth from the shareowners, the creditors, and the top
executives to the rest of the country.
By providing them with loans at below-market interest rates, the
TARP and the much larger Fed and FDIC bailouts, allowed the banks to
survive the crisis created by their own recklessness. This was like
giving away food during a famine. The banks have repaid the food with
interest now that the harvest has come in, but to pretend that we did
not do them an enormous favor at enormous cost to taxpayers (we could
have rescued others with these loans) is absurd.

Finally, even if we put aside all the above complications and
concede that the TARP injections into the banks “made money,” it was
for the politicians, not the taxpayers. I certainly don’t
remember getting a dividend check in the mail for my share of the $7
billion profit that Yglesias trumpeted.
It is notoriously difficult to pin down money flows in Washington.
But I have yet to be convinced that the government won’t simply spend
the incoming paybacks on other things.

Did TARP Prevent Another Depression?

A crucial point in the case for TARP is that without it, we would
have plunged back into another depression. For example, Simon
Johnson wrote
last week,

People who are opposed to bailouts of any kind like to argue
that TARP was not really necessary. Banks could have been allowed to
fail and the economic fallout around the world would not have been so
This was, of course, the view taken by policy makers in 1929�31,
after the Great Crash. Top people at the Federal Reserve and Treasury
argued that the United States had experienced a financial mania (true),
that a fall in asset prices was long overdue (quite likely, at least
for stocks), and that the right approach was to stand back and — in
unforgettable words of Treasury Secretary Andrew Mellon, let the
private sector “liquidate labor, liquidate stocks, liquidate the farms,
liquidate real estate.”
The result was the Great Depression. No responsible policy maker
would want to run that risk again.

There is so much wrong in the above quotation that it would take a
whole book
to set the record straight. For now, let me mention two
things: First, the only source we have for that infamous Mellon quote
is from Herbert Hoover’s memoirs, and his point in setting up Mellon’s
position is to then declare that Hoover didn’t listen to Mellon’s
There is no ambiguity here; Hoover
repudiates the liquidationist plan
in his memoirs immediately after
laying it out.

Second, we don’t have to trust Hoover’s memoirs to know that he
wasn’t a liquidationist. To take just one example, we can go look up in
Wikipedia to learn that the Reconstruction
Finance Corporation
was established in the Hoover Administration in
1932 and “gave $2 billion in aid to state and local governments and
made loans to banks, railroads, farm mortgage associations, and other
businesses.” The article then adds, “The loans were nearly all repaid.”
See, the taxpayers made out like bandits back in the 1930s, too!

Did TARP Restore Business Lending?

The primary reason that TARP allegedly averted another depression
is that it fixed the credit markets. Here’s Timothy
praising his staff two weeks ago:

Two years ago the financial system was falling apart.
The banks and financial institutions that Americans rely on to
protect their savings, help finance their children’s education, and
help pay their bills were at risk in ways few had ever experienced.

The institutions and the markets that businesses rely on to make
payroll, build inventories, fund new investments, and create new jobs
were threatened like at no time since the Great Depression.
Across the country, Americans were starting to question the
safety of their money in our nation’s banks, and a growing sense of
panic was producing the classic signs of a generalized run.
Now, TARP was not perfect. But it has delivered in ways few
could ever have imagined.
It’s not just that people are confident today that their money
is safe in banks; it’s not just that household wealth is much higher
than when the President came into office; it’s that the cost of
borrowing for businesses and municipal governments has come down
significantly; it’s that families can again buy a new home or car at
low rates and put their kids through college.

Geithner was wise to focus on interest rates, rather than the
actual amount of loans going to businesses. Look at the chart:

Figure 2

Yes that’s right, commercial and industrial loans at all
commercial banks were at an all-time high — right when TARP was
implemented. And then they fell like a stone. This doesn’t prove that
loans would have been higher in the absence of TARP, but it should make
us pause when we hear how great the program was in getting credit to
small businesses.


The TARP was crooked from the very start, using taxpayer funds to
bail out some of the world’s richest people from their own foolish
investments. The claims that it made taxpayers money are unfounded.
Even worse, TARP taught investment bankers an important lesson: During
a boom, make as much money as you can, no matter how short-term the
profits will be. When the bubble pops, the Treasury and Fed will be
there with a taxpayer-funded pillow.