As reported by David Wessel in "In Fed We Trust," Hank Paulson was worrying about how history would remember him when he decided not to rescue Lehman Brothers. "I'm being called Mr. Bailout. I can't do it again," he said.
His plaintive whine is understandable. Nearly everyone hates the idea of bailouts -- except those who receive them. But here are a couple of data points from the Financial Times concerning the Troubled Asset Relief Program (TARP) that bear considering. (Found via Marginal Revolution.)
The U.S. government ... is sitting on a paper profit of almost $11 billion on its 34 per cent shareholding in Citigroup, its only direct stake in a large financial institution.
The U.S. authorities received more than 7 billion shares in the troubled financial group at $3.25 apiece, after converting $25 billion of preferred stock into common equity at the end of last month.
Since then, Citi's shares have rallied, and closed on Friday at $4.70, increasing the value of the government's stake by $11 billion.
So what, you say: Paper profits are just that, paper, and this week's gain could be next week's loss. But the government has also earned cold hard cash profits on its other TARP investments, much of which have been paid back.
The government said it had earned an annualized return of 23 percent from its $10 billion investment in Goldman Sachs under TARP. In June, Goldman returned the $10 billion and later paid another $1.1 billion to buy back warrants attached to TARP aid. Morgan Stanley, American Express and other banks have done the same, leaving taxpayers with substantial profits.
The libertarian-leaning economist, Tyler Cowen, who generally frowns on government intervention in the economy, looks at these numbers and asks his readers: "Were the Bailouts a Good Idea?"
His answer? A careful yes, clearly taking the position that the government's balance sheet is not as bad as it would have been if the TARP funds had just disappeared down the Wall Street drain.
If another big negative shock comes the government's liability position still could turn out to be much worse. But if we stop and click pause and evaluate the policy today -- the answer to my question is "yes, the bailouts were a good idea."
Without the bailouts we would have had many more failed banks, very strong deflationary pressures, a stronger seize-up in credit markets than what we had, and a climate of sheer political and economic panic, leading to greater pressures for bad state interventions than what we now see.
Now, it should be noted that, at least as far we can tell now, it will be quite a while -- if ever -- before the government's investment in AIG gets repaid, and we have as yet no idea whether the interventions to help GM and Chrysler will restore those companies to profitability. There is also the huge challenge of unwinding all the other government programs that helped to ease the credit crunch by making it easier for financial institutions to borrow money. And of course we will never know what would have happened if the TARP money had never been disbursed at all, and Wall Street's best and brightest had been left to sink or swim on their own.
There should have been tighter conditions on the bailouts, and if we don't end up with a reformed financial regulatory system with teeth after all this then we will truly have "wasted" the crisis, to borrow Rahm Emmanuel's immortal words. But when all the shouting is over it might be hard to contest one fundamental historic point.
The bailout stopped the panic. There could be worse things than spending the summer in a nasty argument about healthcare and the fall fighting about climate change. We could still be in freefall, but we aren't.