Making or Losing Money On the Bailouts

An unsettled debate revolving around the issue of “bailout success” is whether making a profit off of the bailouts is a justifiable proof of success. A major fear of The Bailout bill critics was losing taxpayer money. Focusing just on The Bailout itself, that is $700 billion of cash from “hardworking Americans” that was used to prop up bad business models and save risk takers from the consequences of their own actions. The Treasury argued then that we would get the money back in the from of returned loans, dividends, and interest payments.

And we might get it back, but if we do does that mean the bailout was a success? If we don’t does that necessarily mean it was a failure? Is the measure of The Bailout’s success how much farther the economy might have dropped? Can we say it failed because dozens of banks have too and it didn’t stop a massive slide in the stock market which didn’t end until March 2009?

We have gotten some of The Bailout money back:

Calculations compiled for The New York Times show that the government has collected profits of $4 billion from eight of the biggest banks that have fully repaid their obligations under the Treasury’s main bailout program — a return of about 15 percent annually. Calculations reported in The Wall Street Journal showed that the Treasury made $5 billion from 34 firms that repaid bailout money, for a 7 percent annualized rate of return.

But we can at least know that the government isn’t likely to get all of the money it has used to “save” the financial system over the past 20 months. The New York Times got it right in an oped writing:

…the big picture is bleak. Estimates by Moody’s, presented in recent Congressional testimony, suggest that of the $12 trillion the government has committed to fight the financial crisis and recession, the final tab to taxpayers will approach $1.2 trillion. That is equal to about 8 percent of the size of the economy. For comparison, the savings-and-loan crisis of the early 1990s ultimately cost taxpayers some $250 billion in today’s dollars, or about 3 percent of the size of the economy.

In the end, the loss of taxpayer money is important. We trust our government to be stewards of the money we give it in order to serve “we the people.” The flippant use of taxpayer money has demonstrated a dangerous entitlement attitude towards taxpayer money that shouldn’t be played down. But the loss of money really isn’t the full measure of failure of The Bailout and related bailout programs.

First, moral hazard will be a lasting legacy of the bailout programs. Second, there are firms operating today that might not otherwise be alive, perhaps Goldman Sachs, and if so then a bad business model has been maintained, the wrong rewards given, and future problems await. Third, bad business practices have been maintained. There has been never ending critiques of bonuses. I would argue that they weren’t the evil many claim, but we really won’t ever know because the system that used the bonus structure was kept afloat. Had it failed as it should have and bonuses not return, then we could have seen how that business practice has been worked out as ineffectual. Had it come back in a thriving market maybe we would have been able to focus on other business practices as the real culprits.

The point is that The Bailout and whole of the bailout programs from Washington have served to create many unmeasurable and still unknown consequences. Preventing the next crisis, or knowing about it at least, will require a careful look at what these could be.