The bailout was a bust for most taxpayers

October 4, 2010

Was the bailout of the U.S. banking, auto and insurance industries worth it?

As the Troubled Assets Relief Program comes to a close, I won’t be popping any champagne corks. The Federal Reserve and U.S. taxpayers are still owed at least $2 trillion and at least two black holes remain in the bailout scenario.

The conventional wisdom is that life as we knew it was preserved and a 1930s-style depression (or worse) was averted.

Yet for millions of Americans, the bailout hasn’t helped them a bit. They are still punch drunk and often jobless from Wall Street’s and the bankers’ Las Vegas benders.

Former Goldman Sachs manager and author Nomi Prins tells me “Main Street is not better off, because it did not receive the lion’s share of the grandiose focus, subsidies, monies and removal of toxic asset aid that the banking sector inhaled into the top levels of their institutions.”

Prins, who authored the definitive autopsy of the meltdown in “It Takes a Pillage,” challenges the idea that the bailout money ever trickled down to people who needed it the most.

“That’s why defaults, delinquencies, foreclosures, bankruptcies and unemployment rates have risen — none of which is an indication of Americans doing better, even as banks repaid TARP and are eager to put the whole ‘mess’ behind them,” Prins said.

You don’t have to look too deep into housing forecasts to see that the U.S. home market still resembles a typhoon-devastated country.

The shadow inventory of homes that could be reverting back to lenders is staggering. There may be as many as “four to 12 million foreclosures yet to come” touching nearly every neighborhood in the country, according to real estate author Ilyce Glink.

One of the reasons the housing debacle seems like a bottomless pit is that the widespread unemployment triggered by the meltdown is pushing ever more homeowners into foreclosure. The American Dream is shattered for them.

While the stated jobless rate is hovering around nine percent, it’s really 12 percent to 20 percent when you include inner-city residents and those who have stopped looking for work and no longer receive unemployment checks.

Meanwhile, the two entities that were supposed to lend stability to the housing market and middle-class neighborhoods — Fannie Mae and Freddie Mac — are on life support.

Will the Obama Administration wind them down, buy their bad loans or simply privatize them? We probably won’t know until well after the November election. In the interim, Prins estimates that taxpayers are on the hook for a nearly $7 trillion implicit guarantee of the mortgage companies and their debts.

Am I ignoring TARP’s silver lining? Financially, it wasn’t a complete bust and taxpayers made money on the funds repaid. The largest financial rescue in history has produced some dividends for the U.S. Treasury. Big banks, Wall Street, goliath insurer AIG, the mortgage market, GM and Chrysler all got loans and will survive — at least until the next crisis.

On paper, taxpayers reaped anywhere from a 10.2 to almost 20 percent return, according to The Banker magazine. That’s $6.8 billion in dividends from institutions like Bank of America, JP Morgan Chase and Wells Fargo.

Along the way, money market funds got rescued, Fannie and Freddie became wards of the state and the world’s largest banks and insurers were saved from their rapacious derivatives trading.

The true measure of whether the $8 trillion pledged thus far on the total bailout was well spent, however, is gauged in lost opportunity cost and unaddressed social capital needs.

Could the financial rescue money have been better spent fixing some $2 trillion in dilapidated levees, bridges, water systems, dams, roads and schools?

Would we have been better off investing the TARP funds in alternative energy, our moribund public transportation infrastructure, curing cancer or providing world-class educations for children struggling to compete in a global economy?

It’s painful to say that while the bailout perhaps saved millions of jobs, it did nothing to create new ones — save for a handful of bureaucrats counting the billions that went to a fortunate few.

John Wasik is also the author of “The Cul-de-Sac Syndrome: Turning Around the Unsustainable American Dream.”


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When this administration came out with their grandiose bailout program, a prominent, US, Keynesian economist said something like this -“It won’t work, unless things get better.”
In other words, it would have worked, had it worked.

But it didn’t work, although everybody wanted it to work.

This probably means it couldn’t have worked to begin with, because ideas based on circular logic have an annoying tendency to fail, even if the logic is backed by hope and apparently good intentions, for the most, and by the biggest, most effective hype machine the world has ever seen.

Posted by yr2009 | Report as abusive

Always nice to see an opinion column trying to sound like an article by making up statistics. Unemployment has been going down for eight months, not up. At no point in this piece does the writer make any statement which actually contradicts the “conventional wisdom” he is trying to debunk. Reading this, there’s no reason to believe the TARP and ARRA didn’t do their jobs.

Posted by TrueIronPatriot | Report as abusive

TARP mitigated the damage, but it didn’t really repair anything. The author made an excellent point mentioning our decaying infrastructure. We may be a finance and technology based powerhouse now rather than an industrial one, but that infrastructure is still important to business and critical to our quality of life.

Posted by WRL | Report as abusive

TARP and ARRA did their jobs – they prevented a huge depression, so far. The problem is, there is nothing to help improve the situation, the economic foundaments are practically devastated, and if things start worsening, it will be impossible to devert, since no financial weapons has left. The author questions the statistics of ~9% unemployment. I question that statistics too – it is strange to see no change in a dinamic economy as the American. Most likely, the pace of unemployment matches the pace of people left out of unemployment compensation, i.e. out of the statistics. Besides, nobody truely presents statistics of personal wealth, the purchase basket for the CPI index has changed, but not the method of calculation, etc. The overall feeling on Main Street is that today is worse than last year, tomorrow will be even worse, but statistics doesn’t reflect that.

Posted by Ananke | Report as abusive

Simple – none of the TARP went toward restoring local manufacturing that accounts for 9 out of 10 jobs.

Unregulated free-trade equates to job losses and recession.

Couple of recent steps in regulating unfair trading partners via import-duties and regulating tax-breaks to corporations that are creating no meaningful local jobs, are in the right direction but are not comprehensive and aggressive enough.

I wish we can stop the war spending that seems to be a perpetual drain on our resources, institute more comprehensive regulated free-trade and mandate manufacturing pertinent to new technologies to be local for a period of the first 7 years, for example, toward restoring the local prosperity.

Posted by Mott | Report as abusive

“Always nice to see an opinion column trying to sound like an article by making up statistics.”

@TrueIronPatriot, you always prod people to provide evidence to their claims yet when the author of this blog provides links to where he is getting his information from you claim he is making up statistics. Should you not check the validity of his references first? You always believe and offer the links you provide to state your cases as truth, perhaps the author here believes his references to be truth also.
You always present your arguements in a clear, rational manner and never attack anyone regardless of their opinions. I do think it is a stretch for you though to claim the author is “making up statistics” when references are presented, and as I stated already, that is what you always ask for in an opposing opinion.
In any case keep fighting the good fight and stand up for what you believe. Things will get back on track eventually.

Posted by iflydaplanes | Report as abusive

The bailout worked. The problem is that it didn’t prevent a depression it prevented a crash. If we are not in a depression why is the Fed using quantative easing to supplement monetary policy? Why did the Fed say GNP growth was too slow and inflation too low? If we add housing prices to CPI, we are in the grips of deflation. High unemployment, deflation, and low GDP growth. Think of it as a “soft” depression. Recovering from a soft depression will take a whole lot of money and time. The problem is the economists that didn’t see the collapse are the same one’s telling us the recession is over when it really just began.

Posted by JMRAG | Report as abusive

Why was the auto bailout even brought up? After the first sentence, nothing else is said specifically about it. Of all of the bailouts, it seems to be the one that was most effective at keeping jobs. And despite how trivial John Wasik makes it seem, the loss of a large amount of jobs would have pushed the US economy further down the drain.

Posted by gmmw | Report as abusive

“Would we have been better off investing the TARP funds in alternative energy, our moribund public transportation infrastructure, curing cancer or providing world-class educations for children struggling to compete in a global economy?”

The above question shows just how ridiculous this partisan opinion is. According to John, if not for the bailouts, Cancer would be cured, traffic would cease to exist because of the amazing public transportation system, climate change would be averted… and of course, let’s not forget about the poor, struggling children. Won’t anyone protect our children from the bailouts!!!

Posted by gmmw | Report as abusive


You’re absolutely right. I am a stickler for references, and the author of this piece provide many. The one that bothered me was this statement:

“While the stated jobless rate is hovering around nine percent, it’s really 12 percent to 20 percent when you include inner-city residents and those who have stopped looking for work and no longer receive unemployment checks.”

There’s no reference for that data, and it’s a rather specific claim. Specifically, the implication here that unemployment data ignores inner city residents is a strange accusation.

The author makes a few good points, but the overall groundwork of his argument is baseless. It creates the feeling, or perhaps reveals the truth, that his argument adds up to nothing.

Posted by TrueIronPatriot | Report as abusive

TARP bailed out the banks and allowed them to swallow up the competition. It did not require them to help the victims of the financial crisis that resulted from their irresponsible and predatory lending practices.

I moved out of my home a year ago to go where there was work, and the bank still has not finished processing our empty home.

I can’t move forward and start another small business until I get this settled with the bank. They would require me to pay the difference between what I owe and what it sales for, if they think I can afford it.

I will go from having $75K in equity to owing the bank $105K after a short sale if they decide it is so. They created this mess and were bailed out with my tax dollars, and they still want to act like I owe them money.

I estimate my loss in income over the rest of my career to be in excess of $1 Million dollars.

I think that the banks should have to accept deed-in-lieu of foreclosure when it is offered. Isn’t taking our homes enough? Let us move on already!

Posted by Get_a_Clue | Report as abusive

This was a good post, especially the quotes from someone who knows, Nomi Prins.

The reason jobs have not returned is simple: outsourcing. In the past, American factories started hiring after a recession. Now the hiring is being done in China and India. Wall Street is mostly disconnected from job creation in the USA.

The TARP had one monstrous flaw: it allowed incompetent bankers to retain control of the companies they wrecked. They should have been allowed to enter Chapter 7 bankruptcy, and the second the filing was made, the government should have stepped in and nationalized them. This would have eliminated the outrageous bonuses. Shareholders would have been wiped out, but if you cannot take the heat, stay out of the kitchen.

Many people said that if we would not have bailed out Wall Street bankers, we would have seen terrible things, e.g. precipitous drop in stock value, high unemployment, etc. We had this anyway, so the TARP was mostly wasted.

And the recent Wall Street reform was half-baked, allowing the continued unregulated trading of OTC derivatives. All derivatives must be traded via a clearinghouse so we understand the nature of the beast.

Posted by saucymugwump | Report as abusive

TrueIronPatriot wrote: “There’s no reference for that data, and it’s a rather specific claim”

Yes, the range of 12-20% is rather vague, but our government tries very hard to ignore actual unemployment data. The BLS’ August jobs report ( nr0.htm) stated that the number of underemployed people is 26.2 million. There is no way the government can know the actual number of people who have stopped looked for work, as they only do a sampling. It is fairly well-known that the unemployment rate in Detroit for blacks is around 50%; even Glenn Beck acknowledged that. The September jobs report will be available tomorrow.

Posted by saucymugwump | Report as abusive

All the kings horses and all the kings men could not put Humpty US banking together again. We have new shiny government buildings, new fire trucks, new college buildings, but we do not have any decent paying jobs. We literally ran the car until the engine quite, then expected that a tune up and new roads would make it run fine again. The car needs rebuilt with new industries, new politicians and most of all new bankers.

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