Government does not invest a limited pot of money like 'savings', it conjures up money out of nowhere and can deploy ulimited amount of capital. The only limit on this activity is literally breaking the economy, causing inflation, etc,
If you propose we dump that money in education, well, we should, but it does not mean we should not bail out the banks - these two problems do not compete for same resources.
Sure. The GGP tried to say the bailout was an investment with profits though. It's not as simple as "They got low returns so it was a bad investment", but it's also not as simple as "They got returns so it was a good because it was an investment."
Even if you accept the amazing, faulty premise inherent in this comment (see the other response for more on why one shouldn't), the timeline is misleading.
For example, TARP (about $475bn) was more than 93% recovered by the end of 2012. The bank-related programs had already over-recovered $23bn versus the $245bn disbursement by that point with approximately a 4% internal rate of return.
Not to mention the inflation rate between 2008 and 2010 was -4% and then 0% for a hot minute thereafter. Factoring that, plus the 4% nominal return, meant that the programs yielded something like 8-10% annualized real returns.
Not if you consider that the return was a nice side effect of also not crashing the world economy. Not every "investment" is just about making money, this one just had the nice side effect of not costing it as well.
This is a commonly repeated trope that is completely false and based on very questionable accounting. Namely the omission of opportunity cost and the comparison of static parameters to temporal parameters.
What do you think that paper actually says? I keep seeing it cited as "no, this is how much the bailouts really cost!", but that's not what it's about at all and anyone who has actually read it cannot credibly come to that conclusion.
It's about assessing the fair value of the bailout programs, at the time they were executed - i.e. the estimated net present value of the future cashflows under the bailout programs. The author argues that it unhelpful from a policy perspective to do an ex post analysis because it only describes what happened in this case, rather than what could've happened. i.e. when considering whether a bailout is good value, we should consider what happens if its unsuccessful.
There is absolutely no doubt that the bailouts have been profitable for the government in terms of actual repayments.
"Drawing selectively on existing cost estimates and augmenting them with new calculations, I conclude that the total direct cost of crisis-related bailouts in the U.S. was on order of $500 billion, or 3.5 percent of GDP in 2009. [...] Those conclusions stand in sharp contrast to popular accounts that claim there was no cost because the money was repaid, and with claims of costs in the multiple trillions of dollars."
From 3.1.3. See Wall's analysis of Fannie Mae and Freddie Mac for more detailed discussion of their bailout costs:
"Treasury collected $147 billion from Fannie and $98 billion from Freddie. As explained earlier, interpreting this tally as a cost measure is conceptually flawed for several reasons. Wall (2014) also discusses the shortcomings of this approach, which has been used to argue that the government has been more than fully repaid and that value should be returned to the shareholders."
From the conclusion:
"Nevertheless, the total is large enough to conclude that the bailouts were not a free lunch for policymakers as some have claimed."
What the paper is saying seems pretty clear to me: bailout costs have been inaccurately measured and reported popularly at both ends. It was neither unfathomably expensive, nor profitable to the tax payer.
If you lend me $100 and I pay you back $107 you can declare you profited from the loan if you literally only look at the principal and repayment amount, but finance is not so simple, especially at a national level. Opportunity cost, inflation, depreciation, and numerous other factors exist. The total cost of you lending me $100 could have been significantly more than $107.
I invite you actually to read the whole paper. Please pay attention specifically to section 2.1 where the author contrasts "fair value", "ex ante" and "ex post" approaches to direct cost estimation.
The paper says that you cannot look at a successful bailout and conclude that it must have been good policy, because success was not guaranteed; you instead need to look at the range of outcomes that are reasonably possible to estimate the likely costs.
The author doesn't at all say that the "ex post" account of actual cashflows is an inaccurate measurement of what happened; only that it doesn't represent a useful policy tool for estimating whether other bailouts represent good value.
Section 2 is literally the basis of my original point that declaring repayment as profitable to the tax payer is inaccurate accounting of costs. I've read the entire paper. I'm not sure why you're so bent on ignoring plainly stated facts that align with my contention that the bailouts were not profitable to the tax payer. They weren't. It's explicitly stated.
"At 3.5% of 2009 GDP it is a cost that is big enough to raise serious questions about whether taxpayers could have been better protected."
It even directly states that citing the propublica bailout tracker, which the root comment does, as evidence of "profit to the taxpayer" is deeply flawed and one of the reasons the paper is addressing the issue. This is the entire reason I cited it
"The press typically reports bailout costs on an ex post cash basis despite the problems with that approach. For example, ProPublica, a highly regarded non-partisan news organization, created a 'Bailout Tracker' that has been keeping a running tally of government asset purchases and cash receipts under TARP and from the bailout of Fannie Mae and Freddie Mac. In their most recent update dated September 27, 2018, they report a total net government 'profit' of $97 billion. Policymakers also tend to cite ex post cash results. For example, in 2012 former president Barack Obama claimed that, 'We got back every dime used to rescue the banks.' Other media outlets report skepticism about such claims,7 but news organizations generally lack the financial acumen or resources to produce credible cost estimates of their own."
You're not going to force your flawed interpretation onto me and convince me the author is not stating exactly what she's stating plain as day, and has reinforced with subsequent work and commentary. That's called gaslighting
“My analysis imposes the discipline of a fair-value approach, which incorporates the uncertainty about the size of eventual losses at the time assistance was extended and the cost of that risk. By contrast, popular accounts simply add up realized cash flows or tally total risk exposures.”
As we look back, there is no uncertainty. We know what happened. The bailout was successful (within its parameters) and was more than repaid. You don't need to do any counter-factual analysis to show that, you can just go look at the reports to Congress from the Department of the Treasury.
To understand that paper, take an analogy from gambling.
Say I plan to play roulette; I'm the U.S. government, the bet is the bailout. Let's just assume I'm going to bet $1 on red.
I want to understand the cost of the bet at the time I place it; this is the fair value of the wager (bailout). The odds against winning a bet on red with an American roulette wheel are 1 1/9:1 and the payout is 1 to 1 - so the expected (fair) value of the bet is -$0.053. The author attempts to do the same for the bailout, bearing in mind the uncertainties, and comes up with -$500bn.
Now, at the roulette wheel, the expectation that I'm going to lose out $0.053 needs to be balanced against the excitement and pleasure of the wager. In the bailout case, the fair value of the bailout needs to be balanced against the anticipated broader economic results of the intervention like containment of the credit crisis and the shoring up of the mortgage system.
We spin the wheel and it's 32, red. We're lucky and so we win back our stake plus another $1. In the case of the bailout, the intervention was successful, the economy recovered, and the bailout money was more than repaid.
The popular account that the author alludes to corresponds to looking at this bet and saying "betting on red was obviously the right thing to do because I made 200% of my money back and I had fun gambling". The author isn't disputing that the bailout was more than repaid (she stipulates that in the abstract of the paper!), or that the economy rebounded. She is absolutely right that this is the wrong way to look at the expected cost of a bailout in the future.
Fundamentally, from a finance/economics perspective, there is no incompatibility between saying "the fair-value cost of the bailout was $500bn" and "the government made billions of dollars on the bailout". That's because the definition of a cost requires an analysis of the expected return. You do agree with this, right?
The original comment stated that the bailouts have been profitable for the taxpayer and cited the ProPublica bailout tracker as evidence of this.
I said that they have not been profitable to the taxpayer. I pointed out that the conclusion that they've been profitable to the tax payer is based on flawed cost accounting methods and cited the paper.
In the paper, the author very explicitly stated it was not profitable to the tax payer, directly calls out the misleading nature of the ProPublica tracker, explains why it's misleading, verbosely explains and justifies a more accurate cost accounting methodology, describes the results of using this methodology, and commentates on how these results and the methodologies that produce them may be used in the future to make more accurate and less misleading cost assessments of bailouts in the future.
I've directly quoted the paper numerous times in which the author clearly states that the bailouts were not profitable to the taxpayer, flaws in methodologies that indicate they were profitable to the taxpayer, and why different methodologies are needed that more accurately reflect whether the true cost of a bailout results in a situation that is profitable to the taxpayer.
In conclusion, and to reiterate my original point. The bailouts were not profitable to the taxpayer except when using deeply flawed cost accounting methodologies such as ex post cash flow analysis, which the author, in great detail, explains is a woefully inadequate for measuring the cost to the taxpayer of a bailout.
In fact because it is most likely that a recession will be followed by a recovery, it is probable that the government will show a “profit.” However, bailouts are costly because of the possibility of relatively unlikely but very costly states of the world where recessions persist and recoveries are low.
As I think we can agree, it was not the case the 2008 recession was persistent with low recovery; yet it is the possibility this could have been the case that increases the cost.
Cost analysis is absolutely orthogonal to an actual accounting of profit and loss, which is why the author consistently uses quotes around the word "profit". The cost of doing a thing has nothing at all do with whether it turns out to be profitable! Profitability is exactly a matter of ex post cash accounting; there is just no other way to measure it.
I guarantee you have never quoted a section of the paper that says the bailouts were unprofitable to the taxpayer because the author never makes that claim: because it would be false. You will also never find a reference to "cost accounting" in the paper, again because those concepts are orthogonal within the author's framework. By all means double-check the paper on both those points.
If you're trying to answer the question "did the tax payers get back more money than they put in to the bailout", then the only way to do that is by ex post analysis of cash flows: the answer is "yes they did". If this were a business, that would be the definition of a profitable investment.
Until you understand that costs are nothing to do with profitability, you're doomed to misunderstand this paper.
"The government earns a 'profit' from the bailout of -$200 + $210 = $10 million. Figure 3 illustrates the situation and makes clear its conceptual shortcoming."
"At 3.5% of 2009 GDP it is a cost that is big enough to raise serious questions about whether taxpayers could have been better protected."
You're just plain wrong mate. Taxpayers don't need to be protected from profitable ventures. I dunno what the hell definition for profit you're making up, but it's literally defined on the basis of cost in accounting and finance.
... "conceptual shortcoming" as a cost analysis technique, which is the subject of the paper. I literally just explained this in my prior post. Cost analysis can tell you nothing about profitability. Cash flow analysis can tell you nothing about costs.
Protection means "structuring the bailout differently to reduce the downside risk".
Accounting profit is literally revenue minus appropriate cost analysis. You can't determine profit without appropriate cost. That's the point of the paper and my contention. You're wrong. Stop gaslighting.
Cost means something different in economics from what it means in accounting. A cost in accounting terms is an expenditure. When an economist talks about a cost, they are talking about an opportunity cost, which is one that is contingent on the expected return of an activity. If you don't believe me, go read about it on Wikipedia or whatever.
Section 2.1.1 - "For a bailout cost measure to be economically meaningful, it has to be evaluated as of a fixed point in time. In most cases, the natural choice is the year the bailout is initiated, for instance, when new legislation is passed or administrative policy changes are announced or implemented, or shortly thereafter."
The author does this. She evaluates the cost of the bailout at a fixed point in time, the year the bailout is initiated, which is to say 2008. She arrives at a number of $500bn.
What happens after 2008 is irrelevant to her cost analysis. If you don't understand this, you don't understand anything about the paper at all. Look at every subsection in section 3 where the author considers the different elements of the bailout. When she's considering fair value cost, it's always in reference to contemporaneous reports (2008/2009 sources) or estimates on that basis.
Also, please stop accusing me of gaslighting: I'm not asking you to question your reality, I'm just asking you to question your understanding of an economics paper - there's no power dynamic here that would put you into a vulnerable position and allow me to bully you, even if that were my intent. We're just people on the internet.
I'm done here now, by the way, as there doesn't seem to be much more to say. If you have friends who have a strong background in economics, I really suggest you show them the paper, and this thread.
Why is there so much misinformation on the 2009 bank bailouts?
The bailouts were loans and investments that became profitable for tax payers.
>In total, the government has realized a $109B profit
https://projects.propublica.org/bailout/