Bryan Caplan  

Will I Lose My TARP Bet?

My AEA Speech on the President... My AEA Speech for Ed Clark, 19...
Back in 2008, I made the following bet:
If the Director of the OMB's 2013 report says that a shortfall exists, I win.  Otherwise, I lose.  The stakes: I will make up to five $100 bets at even odds.
Now it seems like I'll lose:
"Treasury currently estimates that bank programs within TARP will ultimately provide a lifetime profit of nearly $20 billion to taxpayers," Treasury said in a recent news release. But if taxpayers make $15 billion off AIG alone, the total figure could climb much higher.
At the time, friends warned me that creative accounting would kill me.  Looks like they were right:
True, the notion of a TARP "profit" requires some creative accounting.

As numerous critics have pointed out, much of the reason for the windfall comes from the removal of much of the toxic crap from bank balance sheets onto the already hideous balance sheets at Fannie Mae and Freddie Mac.

The National Taxpayers Union calls the profit "a myth, a fiction of Washington accounting...because the banks that got bailed out through TARP shuffled all their bad assets over to Fannie Mae and Freddie Mac, which got their own separate bailout. So, really, it should be no surprise that they're relatively healthy."

I always took this possibility seriously, but was willing to bet that I'd win despite creative accounting.  Any chance the next two years will vindicate me?

Win or lose, I'll continue to look down on the many prominent proponents of TARP who refused to bet me.  And so should we all.

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COMMENTS (8 to date)
Yancey Ward writes:

Wasn't some of TARP used on the car companies? In fact, I seem to remember that the total amoun used to float GM and Chrysler amounted to more than the bank portion is claimed to have made in profit. And, yes, it isn't a profit if the banks return money that came from the injections made by the Treasury to Freddie and Fannie. Also, to generate that $20 billion, how much did the US government have to borrow for that period of time? What else could we have done with it?

Jeremy, Alabama writes:

Not just creative accounting, but creative lawmaking. If, as in the case of GM and Chrysler, you can defraud the existing creditors and shareholders, and give a sweetheart tax deal for a decade, prop up their car loans business, and give money or lend at ultra-low rates for "green" tech, then it might be possible to demonstrate a profit.

I've mentioned this before, but my father-in-law is a Belarussian director of a fish farm. He told me "it used to be very profitable, when the Soviets sent us the fish food for free". This is classic socialist accounting - and in fact it is impossible to determine the true profit-and-loss of any business entangled with the govt.

Richard A. writes:

Treasury Secretary Paulson panicked the country to ramrod TARP thru congress. This, along with the panic already underway, increased the demand for money--slowing down the velocity of money. The Fed failed to offset this decline in velocity causing the worse recession since WWII.

ColoComment writes:

Would someone please explain to ignorant me why thee 'n me are all working so hard to earn a buck if we could just let the U.S. government take all of the U.S. dollars around about and "invest" it for us to get these kinds of "profits"?

Gosh, it seems that it would be even better if the U.S. government would print all the money it could so that it could "invest" even more and get even more "profits"!

I guess I just don't understand this economics stuff....

What if you measured in gold...?

The main reason the TARP shows a "profit" is the unprecedented amount of fiscal and monetary stimulus we've seen since November 2008. When you print enough funny money, everyone's balance sheet looks matter how many people are starving. As my friend Dan Ferris says: When there's no limit to money, there's a shortage of everything else.

Bob Murphy writes:

Uh oh Bryan I hope you have put aside funds in escrow to pay this one too.

Norman Pfyster writes:

I know AIG wasn't included in the TARP funds, and I don't think the Fannie/Freddie transfers were either. The news release notes that Treasury is taking about "bank programs." TARP was a specific program, although it is used loosely to refer to all extraordinary federal actions taken at the time.

Andy writes:

I don't understand this quote: "much of the reason for the windfall comes from the removal of much of the toxic crap from bank balance sheets onto the already hideous balance sheets at Fannie Mae and Freddie Mac." Did the GSEs buy MBS from the banks post-TARP? Can you point me to a source for this?

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