The Troubled Asset Relief Program officially ended last month — six years after it was implemented, ostensibly to stabilize the nation’s financial system. But the Treasury Department’s widely reported announcement that it made a profit on the TARP is a fiction. The taxpayers’ loss on the TARP may have been less than the program’s original $700 billion commitment suggested it might be, but it was still a loss.
It was certainly welcome news in mid-December when Treasury announced it would be selling its stake in Ally Financial, effectively marking the end of a bailout that was hugely unpopular in 2008 and that has remained unpopular in the years since. The bailouts did succeed in shoring up and vastly enlarging the nation’s biggest financial players at a time when the partial correction of hyper-inflated real estate prices was threatening to make some (though not all) of them insolvent. But the bailouts provoked widespread disgust with Wall Street that paved the way for the Obama administration’s heavily interventionist economic policy. The post-recession recovery has been by far the most anemic since the Great Depression. The bailouts also created a lasting problem of moral hazard: If banks know that the government will bail them out in a time of crisis, they will be more likely to engage in excessive risk-taking.
But the wisdom or folly of the TARP is not worth revisiting. The myth I want to tackle is one being reported in favor of the bailouts — that they turned a profit. As Matthew Yglesias of Vox writes, “Treasury now says ‘taxpayers have recovered $441.7 billion on TARP investments including the sale of Treasury’s AIG shares, compared to $426.4 billion disbursed’ for a profit of a bit over $15 billion.”
Now, while a profit of $15 billion sounds enormous, it only amounts to a nominal annualized return of 0.6 percent. Even Treasury Bills (maturing after three years or longer) would have been a better investment, so this is hardly impressive
While this is a miniscule return on investment, there’s another factor overlooked: inflation. Amazingly, although the period since 2008 has been one of at-best-sideways movement in the economy, the U.S. dollar still managed to lose more than 10 percent of its value in that period. Calculated using the Bureau of Labor Statistics inflation calculator, $441.7 billion in 2015 dollars is the equivalent of $402.71 billion in 2008 dollars, which would imply that TARP actually netted a loss of nearly $24 billion. This isn’t a perfect estimate, because TARP funds were paid back at different rates in different years, so the present value of those funds repaid differs, but the rate of inflation averaged close to 2 percent since 2008, so we know that some loss was incurred.
It could additionally be argued that some of the funds paid back aren’t truly “paid back” at all, since they were paid back in a manner that’s equivalent to paying off credit card debt with another credit card.
The “TARP is turning a profit” claim is hardly new. In the past, proponents have looked at the $211.5 billion repaid from the Capital Purchase Program (the first phase of TARP) on $204.9 billion loaned out and concluded that a nearly $7 billion profit was yielded. Mark Gongloff at the Huffington Post pointed out that the problem here isn’t inflation but the fact that nearly half of those funds were repaid with funds that come from loans from other government programs. In other words, one debt was swapped for another. While it may have appeared to show a profit for the Capital Purchase Program, we can’t exactly know what the status of the other loans will be.
While Americans regularly list the sluggish economy at or near the top of their concerns in polls, the Bush-era Troubled Asset Relief Program is now ancient news, and it’s unlikely that many people will be looking closely at the aftermath of the program. The TARP remains unpopular, but at this point nobody really cares about it. The Treasury Department should be satisfied with that, and stop trying to sell Americans the myth that the TARP made a profit.