Bryan Caplan  

I've Won My TARP Bet

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Back in 2008, I noted an obscure TARP provision:

SEC. 134. RECOUPMENT.

Upon the expiration of the 5-year period beginning upon the date of the enactment of this Act, the Director of the Office of Management and Budget, in consultation with the Director of the Congressional Budget Office, shall submit a report to the Congress on the net amount within the Troubled Asset Relief Program under this Act. In any case where there is a shortfall, the President shall submit a legislative proposal that recoups from the financial industry an amount equal to the shortfall in order to ensure that the Troubled Asset Relief Program does not add to the deficit or national debt. (emphasis mine)

In response, I publicly offered 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.
The OMB's 2013 report is now in.  You can download all 510 pages here, then turn to page 39:
As of December 31, 2011, total repayments and income on TARP investments were approximately $318 billion, which is 77 percent of the $414 billion in total disbursements to date. The projected total lifetime deficit impact of TARP programmatic costs, reflecting recent activity and revised subsidy estimates based on market data as of November 30, 2011, is now estimated at $67.8 billion.
Graphically:
tarp.jpg

This is actually more pessimistic than the OMB's previous update, which also had me on track to win:
Compared to the 2012 MSR estimate of $46.8 billion, the estimated deficit impact of TARP increased by $21 billion. This increase was largely attributable to the lower valuation of the AIG and GM common stock held by Treasury.
If you don't wish to download a 510-page pdf, try the CBO's 8-page summary of the OMB report, combined with the CBO's slightly different (but still negative) estimates of TARP's budgetary costs. 

TARP was passed on October 3, 2008.  Since the CBO's report is dated May 23, 2013, you could argue that I am declaring victory a few months prematurely.  However, the CBO report also explains that this is the 2013 TARP report:
Originally, the law required OMB and CBO to submit semiannual reports. That provision was changed by Public Law 112-204 to an annual reporting requirement. OMB's most recent report on the TARP was submitted on April 10, 2013.
None of TARP's cheerleaders accepted my bet, even though their announced beliefs seemingly implied that betting me would be taking candy from a baby.  As far as I can tell, the only people who clearly accepted my bet were EconLog readers Michael K and Rick StewartSteve Roth somewhat ambiguously accepted, so I leave payment to his conscience.

HT: Philip Wallach at Brookings for reminding me about the bet.

Update: All three of my partners have arranged for payment.  EconLog is an clearly an honorable corner of cyberspace.


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COMMENTS (12 to date)
Peter M writes:

The Wikipedia statement of the final result (see text accompanying footnote 3, Troubled Asset Relief Program) has a lower deficit, but I think yours is later and correct.

Perhaps you could offer an edit? The editors of the page are clearly straining to find that this was a good idea.

Rick Stewart writes:

I am delighted to send Bryan my check for $100, a small fee to pay for excellent advice.

Had it not been for his prescient warning five years ago I might have blindly continued my role as a working taxpayer and thus been required to chip in my share of the missing (and growing) $67.8 billion when the bill comes due. Thanks to Bryan, however, I have consciously minimized my paid efforts, simultaneously increased my leisure activities, and will be sitting around drinking gin and tonics while the rest of you indentured folk are working off the debt.

Thanks Bryan ... and when I get your address the check will be in the (e)mail.

Exboyracer writes:

Just curious? What would have happened if nothing was done?

ZC writes:

Glad you won. Now, will be more interested to see if Obama holds up his end of the deal:

"In any case where there is a shortfall, the President shall submit a legislative proposal that recoups from the financial industry an amount equal to the shortfall in order to ensure that the Troubled Asset Relief Program does not add to the deficit or national debt."

I'll bet he submits a half-hearted proposal that won't even have a chance to make it out of committee, thereby fulfilling his obligation but never doing anything to really try to recoup that money from his friends and donors in finance. Would't want to jeopardize any of those board posts or $100k+ speeches he'll be making in a couple of years.

E. Barandiaran writes:

Exboyracer,

Good economists know that they should consider benefits and costs of alternatives. Excellent economists also know that to win a bet they should focus on politicians's promises, in particular those based on understating the costs of anything they are proposing.

exboyracer writes:

E. Barandiaran

What did we get for the 64 billion, or did we get nothing?

Steve Roth writes:

I quite certainly committed to this bet even if you never said "you're on." (You might want to do so in future, publicly in comments, just to keep things clean and kosher...)

I might have held out for the five-year deadline to expire, but those projections suggest it would be pointless. Paypalled.

Looking back, this was an okay bet. My ex-ante prediction was 50/50, so zero projected dollar cost/benefit. And winning would have (viewed ex ante) had greater positional value to me than the projected positional cost of losing (about zero).

You win some...

Steve Roth writes:

@ZC: "a half-hearted proposal that won't even have a chance to make it out of committee"

Are you suggesting that a full-throated proposal would have any chance in the bank-owned Republican house? Get real.

Mark Brophy writes:

What would have happened if nothing was done? The same thing that happened in 1921: the economy would've suffered a deep recession lasting 18 months followed by a boom rather than a protracted recession that has lasted 7 years so far with no signs of a recovery.

Hazel Meade writes:

This may be the wrong place to put this, but I just had what I think is a brilliant idea and a TARP thread seems like the closest thing to a monetary policy discussion.

What if ... instead of the lending out freshly printed currency to large banks or giving it to the treasury to spend .... what if we had a lottery and gave the money randomly to individuals throughout the economy? So periodically some random lucky poor person with be given (say) $10,000,000. This person would then suddenly be elevated to the 1% and could spend it on whatever he wanted. A lot of lottery winners blow their earnings, but so what, the cash would be spent, it would stimulate something or other, and then you would have individuals making their own choices about what to spend it on. And those few individuals would have a chance of being independently wealthy and living a life of leisure for the rest of their lives. The money would be taken completely out of the hands of the state so there would be no risk of it being funnelled through the hands of politically connected individuals (such as through government contracting). And the random distribution would ensure that nobody would unfairly benefit from the creation of new currency.

LaurencePassmore writes:

Bryan is on the right side of the bet, but doesn't convey the actual shortfall very clearly. If I read the The CBO estimate for the shortfall is "only" $21 billion, the OMB estimate is $47 billion (Table 3 of the CBO summary). Or am I missing something?

ZC writes:

@Steve Roth

Your point is the same as mine...the wording of the TARP provision was obviously such that recoupment from the financial industry would never, ever happen. But, it was worded as such so that any politicians who took heat for signing off on it would have the cover story that, "In the law, it says we'll recoup any shortfall from the finance industry". Typical say one thing and smile while lying out both sides of your mouth from both sides of the aisle in Washington.

It's the sort of 'gotcha' legalese the joke of a creation of the Consumer FInancial Protection Bureau was allegedly created to stamp out in credit care and mortgage contracts, yet it will continue to pervade Congressional Bills to the benefit of politicians and their donors.

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