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December 08, 2009

Another rescue plan comes in below the original price tag

Though the tab to taxpayers could still be substantial when all is said and done, it now appears the taxpayer cost of the Troubled Asset Relief Program (TARP) will be substantially lower than was thought not too long ago:

"The Obama administration expects the cost of the Troubled Asset Relief Program to be $200 billion less than projected, helping to reduce the size of the budget deficit, a Treasury Department official said yesterday.

"The administration forecast in August that the TARP would ultimately cost $341 billion, once banks had repaid the government for capital injections and other investments. Congress authorized $700 billion for the program in October 2008."

There is precedent for such good news. Travel back for a moment to the formation and operation of the Resolution Trust Corporation (RTC), the agency formed to purchase and sell the "toxic assets" of failed financial institutions following the savings and loan crisis of the 1980s. As noted in a postmortem by Timothy Curry and Lynn Shibut of the Federal Deposit Insurance Corporation (FDIC), the cost projections for the RTC ballooned in the early days of its operations:

"Reflecting the increased number of failures and costs per failure, the official Treasury and RTC projections of the cost of the RTC resolutions rose from $50 billion in August 1989 to a range of $100 billion to $160 billion at the height of the crisis peak in June 1991..."

In the end, however, the outcome, though higher than the very first projections, came in well below the figures suggested by the worst case scenario:

"As of December 31, 1999, the RTC losses for resolving the 747 failed thrifts taken over between January 1, 1989, and June 30, 1995, amounted to an estimated $82.7 billion, of which the public sector accounted for $75.6 billion, or 91 percent, and the private sector accounted for $7.1 billion, or 9 percent."

While people may debate the approaches taken, it is heartening to see evidence that TARP, like the RTC before it, is ultimately costing considerably less than estimated.

By David Altig, senior vice president and research director of the Atlanta Fed

December 8, 2009 in Deficits, Federal Debt and Deficits, Financial System, Fiscal Policy | Permalink

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TARP should be judged on the basis of its effects on the financial system, and not its cost. So far looks like its working.

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Posted by: ZZ | December 08, 2009 at 10:56 PM

Since the expressed purpose was to 'save Main Street' by handing out the future to Wall Street, the plan has decidedly not worked. Main Street has been pulled through the knothole anyway, and paid for the experience.

Posted by: wally | December 09, 2009 at 09:25 AM

Please. Give us a break. What about trillions of dollars in guarantees given to various institutions. How about junk MBS paper bought by the federal reserve and GSE's. Lets not pretend that the cost to tax payer is going to be minimal. This is going to end badly but only for the tax payers. The banks will make out like bandits.

Posted by: sartre | December 10, 2009 at 01:10 AM

Interesting. An interview I read with Kashkarian had him stating that "700 billion" was a number pulled out of thin air. They had no idea how much to ask, so they decided to ask for as large a number as they could get.

I am glad they didn't go over it. However, I am dismayed at the outcomes learned. The government now wants to create more bureaucracy to oversee the financial system. The TARP has created even more concentration-bringing with it anti-competitive oligopolies.

We need to restructure the marketplace, not re or over regulate it.

Posted by: jeff | December 10, 2009 at 11:41 AM

You're omitting the other expenditures by the government to ensure that these loans would be repaid.

At the time TARP was authorized, they didn't envision spending 850 billion dollars to stimulate the economy and 1.8 trillion dollars to inflate asset prices.

The cost is going to be much higher over time because the Federal government will be running trillion dollar deficits for some time.

Posted by: Les | December 14, 2009 at 09:31 AM

You are ignoring a couple of *extremely* important facts:

The banks are "healthier" and able to buy their way out of TARP (perhaps only for awhile - a disgusting TARP II is not beyond belief) because:

1) The Fed (backed by the Treasury) has bought a trillion dollars worth of crappy MBS assets from the banks - at insanely inflated prices given their risks.

The default risks have therefore been transferred to the taxpayers - who will bleed out for years to come in order to transfuse degenerate banks.

Some success.

2) Savers have had the present value of their savings expropriated due to the zero interest rate policies pursued to save our scummy banks.

Again, some success.

Posted by: cas127 | December 15, 2009 at 08:43 AM

The banks also received massive tax breaks in the stimulus which are inflating the value of the shares that were exchanged for cash from the government. There's a good article in todays Washington Post.

http://www.washingtonpost.com/wp-dyn/content/article/2009/12/15/AR2009121504534.html

Posted by: Les | December 15, 2009 at 09:20 PM

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