Quick Comment on “Making Money” from the Bailout

April 09, 2020

Folks probably recall that the federal government “made money” from the last bailout. Guess what? We’re going to make money from this one too.

Let’s go through the simple logic here. The federal government is by far the lowest cost borrower in the country. It can borrow right now at an average interest rate of roughly 0.5 percent. (That’s averaging short-term and long-term rates.) It is going to lend to the bailout beneficiaries at a higher rate, let’s say 4.0 percent. This means that it will net 3.5 percent annually on the money it lends out.

So, if we take the $17 billion designated for Boeing in the rescue package and assume it is borrowed for a year (it may be considerably longer), then we will make $595 million on this bailout. Sounds great doesn’t it?

But let’s step back for a second. The government can lend money to anyone in this crisis. If Boeing is borrowing from the government at a 4.0 percent interest rate, then it is because it would have to pay more to borrow in the private market. Let’s say it would cost 9.0 percentage points to borrow in the private market. This means that we effectively subsidized the loan by 5.0  percentage points (9.0 percent minus 4.0 percent). That is the same as handing Boeing $500 million on its one-year loan.

If this is hard to understand, suppose I had a home that I paid $150,000 for. Imagine that I could sell it for $250,000 on the market, but I chose to sell it to a friend for $200,000. While I still made $50,000 on the home (I got $200,000 from my friend, but only paid $150,000), I effectively gave my friend $50,000.

In this case Boeing is our friend since it is in the privileged position of being able to borrow at below-market interest rates. In the Great Recession, Goldman Sachs, Citigroup and the other big banks were our friends.

Of course, in principle, there is the risk that these businesses will go under and not be able to repay their loans. In the Great Recession that risk was essentially zero. As then-Treasury Secretary Timothy Geithner wrote in his autobiography, he was not going to allow any more Lehmans. If any of the major banks were threatened with failure, he would give them enough of the taxpayers’ dollars to keep them going. Eventually, getting below-market interest rate loans from the government, coupled with a fairly explicit government guarantee of solvency, will allow even a seriously underwater bank to get back in the black. This is the story of the 2008-09 bailouts.

Can we be assured that Boeing will be able to survive to pay back its loans? My personal bet is that, if $17 billion is not enough to get it through, there will be Round II and Round III of the rescue, so that eventually our politicians and hack columnists will be able to say that we made a profit on the bailout. 

So folks, you should be happy that we are bailing out all these big corporations. We’re going to make money on it!

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