Sunday, January 18, 2009

The actual cost of the rescue

It may have been naive to assume that large portions of the TARP, or Trouble Asset Rescue Plan, were costless to US taxpayers. The Congressional Budget Office has released a cost estimate for transactions conducted so far (this file is in PDF).

CBO estimates that over the period 2009-2018, the capital purchase part of the rescue plan (the initial $350 billion where the Treasury bought stakes in banks) will have a net cost of $14 billion. The Office of Management and Budget estimates $5 billion. They attempt to account both for the dividends the banks involved are paying on the preferred stock and for the value of the warrants (where the government gets the right to buy new common stock below market value and sell it on the market).

In other words, while the cost to taxpayers is not zero, it's not as if $350 billion has been flushed down the toilet. In addition, the rescue package prevented the entire financial system from coming into distress, which could have stopped any form of lending.

That said, once you lend money to an institution, you basically have to trust them to use it wisely. Most people do not, at this point. It may well be that from here on out, the government should concentrate more on aid to taxpayers, aid only the banks that are in greatest distress and attach greater strings to that aid.

Indeed, the American public does not think that any more aid should be offered to the bank sector, and indeed does not think that the aid offered so far has done anything. Frankly, some of this is due to a lack of understanding (albeit this is a hard field to get a handle on). The present Federal Reserve chairman, Ben Bernanke, believes banks will need more capital injections. Bank of America recently requested one, because Merrill Lynch took far heavier losses than they were expecting.

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