The biggest bailout mechanism was the banks’ ability to go to the Fed and borrow hundreds of billions in emergency loans at rock-bottom interest rates, or sometimes at zero. Goldman, for instance, borrowed $600 billion in emergency loans during the crisis period, which makes the $10 billion TARP payment look meager.
Your friend would say that the banks ultimately paid those loans back, which is true, but put it this way: If a bank can go to the Fed, borrow $100 billion at 0% interest, lend it out on the market to all of us suckers as 4% mortgages and 11% credit cards and so on, what does it mean when it “returns” that money to the Fed later on? Are the profits they make in the meantime “earned” money, or is that subsidy? You and I don’t have the ability to borrow at 0%, but Goldman and JP Morgan Chase do.
Not to belabor the point, but there’s another hidden cost to all of us; since the bailouts demonstrated to the market that the state will never let the big banks fail, that means that smaller banks now have to spend more money to borrow on the open market, since they don’t have the same implicit guarantee. So if too-big-to-fail Goldman can borrow at 1.5% while Small-Enough-to-Fail Schmuck Local Bank has to borrow at 3%, that 1.5% is another hidden bailout that will not, of course, ever be paid back.
One could go on and on with this, but here’s the upshot: Yes, the banks mostly paid back the cash bailouts. But they didn’t pay back the money they got via hidden bailouts (like the AIG rescue) and they certainly won’t ever pay back the trillions they received via state guarantees and artificially reduced borrowing costs, which really all came out of our pockets. The bailouts allowed the banks to borrow for less from the state, while simultaneously paying less to private depositors and charging private borrowers more. That’s the real value of the bailout – the difference between how much they have to pay to borrow from the Fed, and how much we have to pay to borrow from them.
Fair. Balanced. American.
Monday, March 07, 2011
In an online Q&A, he discusses that "bailouts were paid back" meme: