Friday, November 26, 2010

Does the government really deserve Buffett’s thanks for financial rescue?

Wed Nov 17, 2010
Does the government really deserve Buffett’s thanks for financial rescue?
Zachary Roth

In an op-ed in Wednesday's New York Times, Warren Buffett offers a belated thank-you to the U.S. government for averting a financial collapse back in 2008. "In this extraordinary emergency, you came through," writes the Oracle of Omaha. "And the world would look far different now if you had not." Buffett praises Fed Chairman Ben Bernanke, current and former Treasury Secretaries Henry Paulson and Tim Geithner, and FDIC Chairwoman Sheila Bair for acting with "courage and dispatch."

The Berkshire Hathaway founder doesn't go into detail about the costs and benefits of the government's various rescue efforts. But his piece takes another high-profile step toward bolstering the emerging consensus among experts that the bailout, despite its extreme unpopularity, was in fact remarkably successful -- saving the economy for what turned out to be a bargain price.

That stance has some merit. But it also glosses over some of the rescue effort's less tangible -- but still enormous -- costs. So it's worth taking a more detailed look at where things stand.

Right now, we simply don't have all the necessary information to do a comprehensive accounting of the final tab for the bailout -- by which we mean not just the Treasury's Troubled Asset Relief Program for banks, but also the efforts to prop up mortgage giants Fannie Mae and Freddie Mac, as well as the flailing automakers at GM and Chrysler, together with additional spending programs by the Federal Reserve. But here's what we can say: To date, the government has spent, invested or loaned $546 billion, according to figures compiled by the nonprofit investigative project ProPublica. Of that amount, $251 billion has been returned. That leaves $296 billion still outstanding -- already far less than the $700 billion price tag that was bandied about for the TARP alone. And it's likely that figure will go down as more banks make repayments.

Back in May, Geithner predicted that just TARP -- including help for GM, Chrysler and homeowners facing foreclosure -- would cost $117 billion, once all repayments were in. Help for Fannie and Freddie would cost $85 billion more, he said. But the government actually stands to make money -- an estimated $115 billion -- on the Federal Reserve's creative finance programs for banks. That gave Geithner a final cost figure for all the government's rescue efforts of $87 billion.

Most people would agree that the price is a bargain for averting financial collapse, which could have caused human misery on the scale of the Great Depression. As Douglas Elliott, a former investment banker now at the Brookings Institution, told the New York Times in September: "This is the best federal program of any real size to be despised by the public like this."

But that's hardly the end of the story. As New York Times financial columnist Gretchen Morgenson has pointed out, the Treasury secretary's tally leaves out the effects of the Fed's near-zero interest rate policy, enacted as a way to spur lending. This policy benefits banks and punishes investors, because it lets the banks earn huge profits on the spread between what they pay for their deposits and what they make from their loans. There's no simple way to calculate a figure for this transfer of wealth to banks, but Morgenson calls it "enormous."

Geithner also overlooked losses suffered when the Federal Deposit Insurance Corp. -- the government entity in charge of winding down failing banks -- has had to enter into loss-sharing arrangements with healthy banks, to get them to take on the troubled assets of failing ones. Again, there's no way to know how much that program might end up costing us, but one widely quoted expert, Christopher Whalen, the editor of the Institutional Risk Analyst, put the figure as high as $400 billion.

And that's not all. TARP was also designed in part to give banks a cash injection that would let them keep bad assets on their books at unrealistic levels -- a setup that Whalen calls "extend and pretend." The banks know that at some point they'll have to assess the value of those toxic assets still on their books. And that's one big reason they're still extremely hesitant to make loans -- which in turn has prolonged the economic slump. Whalen puts that cost at "trillions of dollars," though again, there's really no way to know. And, the government's defenders might say, part of that cost is built into the existence of a crisis in the first place.

You can tell from the vagueness of all these numbers that there's really no reliable way to get a dollar figure for the cost of the government's rescue efforts. And it's also worth noting that even if the cost is in the trillions, a financial Armageddon would probably have cost far more.

But if nothing else, it's worth taking blithe assessments like the government's -- implicitly backed by Buffett's congratulatory op-ed Wednesday -- with the hefty grains of salt they deserve.


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