February 15, 2012
In an editorial on President Obama’s proposed bank tax, the Washington Post claimed that the country made a profit on its TARP loans. This claim is only true if we consider the interest on a below market loan to be a profit.
The TARP involved loans of hundreds of billions of dollars to banks at interest rates that were far below what they would have been forced to make in the market at the time. The Fed lent far more money to the banks through its special lending facilities.
The access to trillions of dollars of loans at below market interest rates in the middle of a financial crisis was enormously valuable to the banks allowing many to survive that would have otherwise have been insolvent. Arguably, this was the best policy for the economy, since it prevented a full-scale financial collapse that would have led to an even larger economic downturn and more unemployment. However it is absurd to pretend that the taxpayers did not give large subsidies to the banks through these bailouts.
[Addendum: The subhead for this editorial is “Why should banks have to pay for the auto industry bailout?” On this topic, Gary Burtless calls attention to the sentence, “If Treasury faces paper losses on TARP now, it is due in large part to the bailouts of insurance giant AIG, General Motors and General Motors’ erstwhile finance unit, now known as Ally Bank.”
AIG is of course not part of the auto industry. There also is a very specific reason that it needed a government bailout. It had issued hundreds of billions of dollars worth of credit default swaps that it would not have been able to pay off, without the bailout.
And, guess who owned the credit default swaps? Yep, it was the banks.
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