[keewee7]

>instead of the usual flow where taxpayers are on the hook for bailing out too-big-to-fail WallStreet banks

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/

[srcreigh]

$109B profit from a $635B investment over 13 years is less than 2% yearly return.

It's a huge waste considering other higher return investments.

EDIT: see replies for much needed nuance

[ClumsyPilot]

This is thoroughly wrong.

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.

[srcreigh]

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."

[NovemberWhiskey]

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.

[arcticbull]

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.

[cguess]

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.

[ClumsyPilot]

> The bailouts were loans and investments that became profitable for tax payers

I dunno man, I was always told that government being active in the market is socialism, and socialism always fails. /s

Surely we could extend this success by having the government invest trillions in zero carbo energy, an investment that has to succeed.

[andrepd]

Opportunity cost ≠ 0$.

[defaultprimate]

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.

https://mitsloan.mit.edu/ideas-made-to-matter/heres-how-much...

[NovemberWhiskey]

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.

[defaultprimate]

From the abstract:

"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.

[NovemberWhiskey]

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.

[defaultprimate]

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

[NovemberWhiskey]

There’s no gaslighting going on here; at worst, one of us misunderstands the paper and obviously I think that’s you.

Read the author describing her work in her own words:

https://www.barrons.com/amp/articles/how-much-the-financial-...

“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?