New York Times, April 18 2010
This Bailout Is a Bargain? Think Again
by Gretchen Morgenson
IT’S way too early to tally the costs of the government’s various efforts to help our nation’s financial institutions survive the credit debacle. But that hasn’t stopped anonymous Treasury officials from claiming in recent days that their Armageddon-avoidance will wind up costing far less than many feared.
One Treasury estimate, leaked to The Wall Street Journal last week, put a price tag of $89 billion on the financial bailout. That’s far below the $250 billion the Congressional Budget Office estimated last year or other analyses that put the all-in number at $1 trillion or more.
Now this is just disingenuous. The Treasury has spent a lot propping up Fannie Mae and Freddie Mac. On Christmas Eve, the Treasury promised to cover virtually all their losses. ("The Treasury on Christmas Eve removed a $200 billion aid limit on each company, extending unlimited backing through 2012.") In other words, the taxpayers were on the hook for $200 billion for each company (Fannie and Freddie). That's $400 billion. Now, the sky is the limit.
Then the Federal Reserve has printed $1.25 trillion to buy up bad mortgage debt. ("The Federal Reserve’s single largest intervention to prop up the American economy, its $1.25 trillion program to buy mortgage-backed securities, came to a long-anticipated end on Wednesday.")
There are many other programs which could cost trillions, in addition to the amount already spent through TARP and the programs mentioned above.
The Federal Reserve strategy of lowering interest rates to nearly zero is taking huge amounts of income away from savers -- people with money in money markets, savings accounts, CDs, and checking accounts are being paid much less in interest. The banks are playing the spread (borrowing from ordinary folks paying them very little, and loaning money out at several percentage points higher). In this way the government hopes banks can earn their way out of bankruptcy or near-bankrupcty. This is at the expense of retired folk and people who loan their money out at interest. Because of government interference, people cannot earn the true market rate of interest on their money. It's theft. Savers are funding the banks' profits.
The FDIC is out of money to make good on deposits at failed banks. There have been, what, 60 bank failures that the FDIC has closed down this year already? That's more taxpayer liability.
More from the Morgenson NY Times article:
“The refusal of the Washington political class to address the issue of bank insolvency quickly via restructuring and recapitalization has extended the economic recovery process by years,” [Christopher Whalen, editor of the Institutional Risk Analyst,] said. “Lending will continue to shrink and real economic activity is suffering. The cost of ‘extend and pretend’ goes into the trillions of dollars of lost economic activity.”