[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?

[defaultprimate]

The original comment stated that the bailouts have been profitable for the taxpayer and cited the ProPublica bailout tracker as evidence of this.

I said that they have not been profitable to the taxpayer. I pointed out that the conclusion that they've been profitable to the tax payer is based on flawed cost accounting methods and cited the paper.

In the paper, the author very explicitly stated it was not profitable to the tax payer, directly calls out the misleading nature of the ProPublica tracker, explains why it's misleading, verbosely explains and justifies a more accurate cost accounting methodology, describes the results of using this methodology, and commentates on how these results and the methodologies that produce them may be used in the future to make more accurate and less misleading cost assessments of bailouts in the future.

I've directly quoted the paper numerous times in which the author clearly states that the bailouts were not profitable to the taxpayer, flaws in methodologies that indicate they were profitable to the taxpayer, and why different methodologies are needed that more accurately reflect whether the true cost of a bailout results in a situation that is profitable to the taxpayer.

In conclusion, and to reiterate my original point. The bailouts were not profitable to the taxpayer except when using deeply flawed cost accounting methodologies such as ex post cash flow analysis, which the author, in great detail, explains is a woefully inadequate for measuring the cost to the taxpayer of a bailout.

[NovemberWhiskey]

One last time.

Quoting the author:

In fact because it is most likely that a recession will be followed by a recovery, it is probable that the government will show a “profit.” However, bailouts are costly because of the possibility of relatively unlikely but very costly states of the world where recessions persist and recoveries are low.

As I think we can agree, it was not the case the 2008 recession was persistent with low recovery; yet it is the possibility this could have been the case that increases the cost.

Cost analysis is absolutely orthogonal to an actual accounting of profit and loss, which is why the author consistently uses quotes around the word "profit". The cost of doing a thing has nothing at all do with whether it turns out to be profitable! Profitability is exactly a matter of ex post cash accounting; there is just no other way to measure it.

I guarantee you have never quoted a section of the paper that says the bailouts were unprofitable to the taxpayer because the author never makes that claim: because it would be false. You will also never find a reference to "cost accounting" in the paper, again because those concepts are orthogonal within the author's framework. By all means double-check the paper on both those points.

If you're trying to answer the question "did the tax payers get back more money than they put in to the bailout", then the only way to do that is by ex post analysis of cash flows: the answer is "yes they did". If this were a business, that would be the definition of a profitable investment.

Until you understand that costs are nothing to do with profitability, you're doomed to misunderstand this paper.

[defaultprimate]

"The government earns a 'profit' from the bailout of -$200 + $210 = $10 million. Figure 3 illustrates the situation and makes clear its conceptual shortcoming."

"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."

You're just plain wrong mate. Taxpayers don't need to be protected from profitable ventures. I dunno what the hell definition for profit you're making up, but it's literally defined on the basis of cost in accounting and finance.

https://www.investopedia.com/terms/a/accountingprofit.asp

[NovemberWhiskey]

... "conceptual shortcoming" as a cost analysis technique, which is the subject of the paper. I literally just explained this in my prior post. Cost analysis can tell you nothing about profitability. Cash flow analysis can tell you nothing about costs.

Protection means "structuring the bailout differently to reduce the downside risk".

[defaultprimate]

Accounting profit is literally revenue minus appropriate cost analysis. You can't determine profit without appropriate cost. That's the point of the paper and my contention. You're wrong. Stop gaslighting.

https://www.investopedia.com/terms/a/accountingprofit.asp

[NovemberWhiskey]

Cost means something different in economics from what it means in accounting. A cost in accounting terms is an expenditure. When an economist talks about a cost, they are talking about an opportunity cost, which is one that is contingent on the expected return of an activity. If you don't believe me, go read about it on Wikipedia or whatever.

Section 2.1.1 - "For a bailout cost measure to be economically meaningful, it has to be evaluated as of a fixed point in time. In most cases, the natural choice is the year the bailout is initiated, for instance, when new legislation is passed or administrative policy changes are announced or implemented, or shortly thereafter."

The author does this. She evaluates the cost of the bailout at a fixed point in time, the year the bailout is initiated, which is to say 2008. She arrives at a number of $500bn.

What happens after 2008 is irrelevant to her cost analysis. If you don't understand this, you don't understand anything about the paper at all. Look at every subsection in section 3 where the author considers the different elements of the bailout. When she's considering fair value cost, it's always in reference to contemporaneous reports (2008/2009 sources) or estimates on that basis.

Also, please stop accusing me of gaslighting: I'm not asking you to question your reality, I'm just asking you to question your understanding of an economics paper - there's no power dynamic here that would put you into a vulnerable position and allow me to bully you, even if that were my intent. We're just people on the internet.