>banks to become even riskier with deposits as they get to keep the profits if their risky bets payoff and get bailed out if they fail
This isn't true, is it? While they do get to keep profits, if the bets don't pay off, the bankers - shareholders, bondholders, employees, executives - all get wiped out (as happened with SI, Signature and SVB). The depositors get bailed out.
They get to keep profits if they win, but lose everything if they don't. No moral hazard, right?
The bankers are closet creatives; they're probably going set up structures where the equity-holders are on paper running something that looks like a charity and there is a class of "depositors" who are making suspiciously high returns. They just need to figure out how to get the money into their sphere of control as a deposit rather than as equity.
Indeed, in the SVB case there is probably an interesting story around why all these startups were banking with this one bank. It suggests complex relationships between entities and it wouldn't be that weird if it turns out the people being bailed out and the equity holders going broke are the same physical people.
So they should be told not to do that and be put in prison if they persist. We (the people) make the rules, but the regulators are rather too cosy with the bankers.
I'd start by stopping any securitization and having the banks keep all their loan assets on their own balance sheets.
If sensible people made the rules the financial industry would be stable and boring, inequality would be far lower than it is, prosperity would be far wider, and life would generally be more pleasant and financially successful - not just for a small cadre of middle class programmers, but for everyone.
I think there's some sort of clipping effect distorting things. If your losses are limited at your assets, then the bet (heads: I gain 2X my assets, tails: I lose 2X my assets) has positive EV.
FTX seems to be processing withdrawals normally. For the life of me, I can't understand why journalists love to speculate instead of doing a 5-second search on EtherScan.
Upon further inspection, it actually looks like the only transactions they're processing are the ones from their own wallet. The entire TX history looks really suspicious to me.
Nothing wrong with taking a caution first approach.
However to me most articles about FTX seem like "panic first, research after". Yes SBF's investment company might be fucked, but customers funds should be totally separate from that.
I think that “should” is working really hard there.
We only have to look at the other crypto firms that have gone bust to know this space is rife with problems in that area - lies about FDIC protection, cryptocurrency and tokens considered part of company assets and subject to creditor claims, rather than customer deposits etc.
Ftx is quite profitable: Good fee income with little marketing expense. So it has a large intangible value.
I assume most traders on ftx only put enough capital on the exchange to keep their positions open in the short term.
So the intangible value of ftx may well exceed the value of clients assets by a significant margin. Then ftx may well be able to issue new shares should it experience a liquidity crunch.
Are you sure? I come bearing no data at all, but it seems everything I listen to or watch is sponsored by FTX. Didn't they also go huge during Superbowl? I would think FTX is one of the largest marketing spenders in crypto purely based on optics (which, again, may be completely off).
This is interesting. The hacker did not return the ETH, so the $320M has come from the deep-pocketed investors and VCs behind Solana/Wormhole.
Interesting to note that the VCs are bailing out the retail users here, instead of the usual flow where taxpayers are on the hook for bailing out too-big-to-fail WallStreet banks.
> Interesting to note that the VCs are bailing out the retail users here, instead of the usual flow where taxpayers are on the hook for bailing out too-big-to-fail WallStreet banks.
If you're referring to the 2008 bail-outs, those weren't grants, they were loans and investments. To date, beneficiaries have repaid more than the initial amount netting the government (and hence the people) a significant profit. $109B to date. And the expectation of significantly more to come. Talk about a good investment. [1]
Fannie and Freddie alone received $191B and have paid $301B in dividends so far - and all the principal remains outstanding.
That's very nice and good. So if I struggle to pay my mortgage, why am I evicted instead of bailed out? It's highly unlikely that I be unemployed for the rest of my life, so I would surely be able to pay back any bailout, with interest to spare. Why do banks struggle and get bailed out, but people struggle and don't?
Or looking at it from another point of view: the money spent on bailouts wouldn't be stored under a mattress if it were not spent that way, therefore you cannot compare $109B with $0. You have to compare it, for example, with the money lost from the moral hazard of rewarding the irresponsible behaviour which led to the most destructive recession in 75 years, or to the effect the money would have had it been spent helping the millions of people that lost their jobs or had their homes foreclosed on, etc.
These are all separate responsibilities of different groups.
The Fed's charter is to maintain a low, predictable rate of inflation over the medium term and to maximize employment. You (in aggregate) won't have a job if all the employers go bankrupt due to direct investments and contagion. This will directly impact (in aggregate) your ability to make your mortgage payments.
Secondarily, regulation of the financial sector to ensure this doesn't happen again isn't JPow's job, it's the job of Congress.
Bailing out the institutions does not preclude further regulation to prevent the situation from happening again. And it certainly doesn't preclude creating a meaningful social safety net.
The Federal Reserve is absolutely tasked with regulating the banks[1].
Congress should not be in the business of preventing banks from imploding in on themselves via regulation. Congressional regulations should insulate consumers from predatory financial institution practices. FDIC insurance exists to protect consumers in the event their banks behave irrationally. There should be no backstop for the banks themselves. Even if they wanted to Congressional regulations couldn't keep pace with the speed at which financial instruments of institutional suicide are forged.
> It's highly unlikely that I be unemployed for the rest of my life
Unemployed? No. Earn what you did before? Anecdotal, but my parents know a lot of people in their 50s that when laid off, never went anywhere close to their prior salaries.
This was especially true for people who couldn't get their current job with their credentials. Plenty of senior people in places like factories and warehouses don't have degrees for example. Would they find work again if laid off?
It's kind of a political decision that varies from country as to what extent to bail people out. The UK for example has a "Support for Mortgage Interest" scheme with various terms and conditions. I'm not sure how the politics play out in the US.
probably because you, collectively speaking, kept electing people who didn't pass anti-eviction laws or strengthened tenant rights. Which most countries by the way did put in place during covid at the very least.
I mean small debtors just get to declare bankruptcy and not pay, which is a pretty good power to have. Large debtors have broader obligations to the community.
Why do people go to jail and lose all ability to make income, but corporations don't? Corporations should get virtual jail time where they're not allowed to operate for a set period of time and have all their rights stripped away.
Honestly, I'd settle for jail time for the actual persons making the illegal decisions, rather than virtual jail time for corporations. You know... personal accountability.
Say a factory is poisoning the riverwater, what is more likely to disssuade such actions: penalties to the company (taken in stride as the cost of doing business), or actual jail time and forfeit of assets to the person making the decision and reaping the profits from it?
The problem is that a company can be a revolving door of people taking the fall for crimes. The better dissuading action is to force the company to shutter operations for a set period of time. It's only fair that such a catastrophic punishment can happen to individuals that it can also happen to businesses that are generally much, much more harmful.
There were multiple stages of bailouts, including Federal Reserve asset purchases which directly transferred resources from dollar holders to for-profit shareholders and bondholders. The Fed's intervention dwarfed the TARP bailout and is the largely the reason TARP was successful...they moved the economic loss from Treasury to the Fed.
That's not how the Fed works. [edit] (As I replied in a peer comment, increasing the money supply is not debasement or a loss - that is measured from its impact. In the years subsequent to the bailouts inflation hit at some point an annualized -4% before returning to a range of 0-2% going into COVID.
Modern economics isn't as simple as "supply up bad.")
Aside from the other considerations, "it was a good investment" stuff is just ridiculous. The general bank isn't in operations to make money - it's in operation to protect the market, the currency and the economy as a whole so whether it makes money is irrelevant to whether these loans were a good idea.
But even more, if the Fed basically designates a bank "too big to fail" (as the Fed did) and loans the bank the money it currently needs, the markets can this. And this allows the bank to "print money" itself by issuing bonds - since now the market knows those bonds are effective guaranteed by the Fed and so equal to money. Thus the bank can easily issue enough bonds to repay or over-pay the Fed. But that's not a "see, problem solved!" situation.
The theoretical problem of this sort of action is naturally these large entities potentially issue loans and borrow without being disciplined by risk. That might be compensated for by other actions - say preventing them from issuing risky loans. But things still wind-up a bit "distorted". I'd recommend Doug Noland's Credit Bubble Bulletin on the subject.
> Aside from the other considerations, "it was a good investment" stuff is just ridiculous. The general bank isn't in operations to make money - it's in operation to protect the market, the currency and the economy as a whole so whether it makes money is irrelevant to whether these loans were a good idea.
The central bank did not make these investments, Congress did, and so the yields did not accrue to the central bank but to the Treasury. If you've ever met the IRS you know that the job of the Treasury is in fact to accrue revenue.
The central bank's charter is to maintain a low, predictable rate of inflation over a medium term and to maintain maximum employment.
> The theoretical problem of this sort of action is naturally these large entities potentially issue loans and borrow without being disciplined by risk.
I agree, which is why Congress needs to better regulate the sector. However that's Congress' job not the Fed's.
I don't think any of your actually change my point that the project making money is irrelevant to and a distraction from the basic impact of the loans.
While one can debate whether just regulation can prevent private investors from engaging in risk, there are other impacts as well. Putting a whole lot of money into bank which invest in "safe assets" like real estate, causes the relative price of those assets to increase. This distorts the economy - that disproportionate rent and real estate price increases over the last ten and twenty years are arguably a product of Fed largess. And these have been a disaster for anyone not being buoyed by the risings - the majority of those in lower income categories.
Housing is a very different matter, one primarily defined by zoning. Zoning rules in major metros prevented supply from meeting demand by preventing new construction. Zoning rules outside major metros made the average new home 2X bigger. [1] Combined these make houses dramatically more expensive even though the cost per square foot on average, adjusted for inflation, is exactly the same as it has been since the 1970s.
Japan for instance has seen their M2 money supply 3X from 1990 to 2022, while the affordability of a house there hasn't decreased since 1995. [2]
This is due to their federal zoning rules which permit housing construction practically everywhere. [3]
The increase in price of housing is what's driving inflation, not vv imo.
And for what it's worth, I think Glass-Steagall (brought in as part of the post-Great Depression reforms) did a very good job of preventing retail banks from investing in toxic garbage and its repeal in 1999 was IMO a major contributing factor to the crisis in the first place. [4]
The increase in price of housing is what's driving inflation, not vv imo.
That's like saying "price increases lead to inflation". Which is true but illuminating.
Limitations on housing construction certainly made homes especially valuable as an investment in places like California. But the vast amount of money-created-out-of-thin-air was what sought this reliable investments. The situation you mention is just related to what I describe, it doesn't refute what I describe.
The main thing is that this inflating of money has a number of noxious qualities, the inflation of housing costs just being one of them. Prices are signals for how resources should be allocated and distorted prices result in distorted allocations of resources. For small example, there's a daft and dangerous plane to restart a fricken gold mine in the little tourist next to my town - with all attendant potential for multiple types of pollution and with gold only getting kind of play because it's a fixed asset with a price driven sky-high by the present money creation process.
>Japan for instance has seen their M2 money supply 3X from 1990 to 2022, while the affordability of a house there hasn't decreased since 1995. This is due to their federal zoning rules which permit housing construction practically everywhere.
I mean I've no doubt that's some sort of a factor, but on the other hand the population of Japan is also almost exactly the same as it was in 1995 whereas the US population has increased by 25% in the same period - I'm not sure I'd so easily rule out demographics as a factor!
All that means is that supply met or exceeded demand, which is the point that I'm making - we are precluding supply from meeting demand via artificial supply constraints.
In their case it was a combination of a declining population and zoning rules. However, the decline AFAIK was concentrated outside urban areas. Tokyo grew from 32.5M to 37.5M between 1990 and 2022 without any increase whatsoever in the real dollar price of housing.
I hope this is not an argument for more bailouts. A lot of people walked away with riches while ruining the US economy. "I lost $100 but lookit I just got back $15" is not a win, it's just... less of a loss.
A bit of googling brought me to a paper which points out that even the CBO and the Congressional Oversight Panel independently came to the conclusion that the bailouts subsidized the banks to the tune of over 60 billion dollars [0]. The paper itself puts the value closer to 90 billion. From the article:
> Costs on an ex post cash basis were only identified for a subset of the above programs, but it is likely that on that basis the government came out ahead. Hopefully, the reader has been convinced that there is little meaningful information in this fact.
> those weren't grants, they were loans and investments
Those loans and investments weren't guaranteed to be paid back, the government took a risk.
Assuming risk of loss is a valuable thing that gets traded all the time through futures, options, swaps and other derivatives. Those futures, options and swaps have a cost.
The fact that the government gave away that value for free means it was a massive gift to Wall Street banks.
I suppose it depends on exactly which program you're looking at, but since you mention Wall Street banks, I assume you're talking about the Capital Purchase Program.
I don't think it's reasonable to say that this was given away "for free". If it was "free" then there wouldn't have been any over-recovery at all, would there?
In the CPP, the government bought preferred stock in a number of banks (mostly not Wall Street ones, but whatever). That stock could've been worthless if the banks failed, but otherwise the banks were required to pay an annual dividend of 5% through 2013 and 9% thereafter; plus there was a whole host of supervision of their activities, including limitations on their ability to pay ordinary dividends.
The government paid far more for the preferred stock than the fair market value. 100% of the difference between the fair market value and the actual price paid was a gift to Wall Street banks that was never paid back.
Nonsense. Most investments carry an element of risk. The Capital Purchase Program may have looked like a bad investment (negative NPV) at the time, but the record makes it clear it actually paid off.
It makes no sense to say "in 2008, the government expected to lose money on the CPP so that's what happened; gift to the banks that was never paid back" and then drop the mic while ignoring what actually happened.
For example: TARP's Congressional Oversight Panel estimated that the $25bn capital infusion into Wells Fargo represented a subsidy (difference between fair market value of the preferred stock and the amount paid) of about $1.75bn.
However, in 2009, Wells Fargo bought back the investment after having paid $1.44bn in dividends. Then, in 2010, the Treasury also sold $840mm in Wells Fargo warrants that were part of the CPP deal.
What we thought would happen: lose $1.75bn. What actually happened: made $2.28bn. If that isn't "paying back" from your perspective, could you please suggest what would be?
An increase in supply is not a debasement. That is measured post-facto based on its impact. Inflation was strongly negative between 2008 and 2010, hitting an annualized -4% in 2009. [1] The Fed was also making good progress unwinding its balance sheet going into 2020, before COVID hit.
I love all the Austrian Economics (thanks Satoshi!) comments we get in a supposedly data-driven environment.
How does this chart [0] show a debasement of any sort? We were in a 'secular demand stagnation crisis' back then! Is everyone here just too young (oh God) to remember 2012?
> How does this chart [0] show a debasement of any sort?
It's the gigantic jump in the blue line almost halfway between 2008 and 2010. A spike in the value of "all assets" is the definition of currency devaluation.
Because QE is an active tool to support credit liquidity and they determined that markets were liquid enough to remove that support.
EDIT: And just to be very clear to the 2 people who read this comment, maintaining a balance sheet is still market support b/c you still buy treasuries on the open market to offset the principle of your existing treasuries that reach maturity. So stopping the growth of the balance sheet just means you're not accelerating support. Tapering is the thing that you do if you're worried that your balance sheet is 'debasing' the currency.
> some economists have interpreted price inflation as a desperate method by which the public, suffering from monetary inflation, tries to recoup its command of economic resources by raising prices at least as fast, if not faster, than the government prints new money.
Only the long-debunked Austrian school defines inflation as a function of supply alone. The rest of the world moved on to defining inflation in terms of the measured, real-world change in the purchasing power of money - which comes under pressure from a number of different factors that aren't captured by supply.
For instance, supply chain disruptions making basic goods more expensive and increasing competition for them. Or, zoning policy prohibiting construction of new housing sufficient to meet demand in high-growth metro areas raising the cost of housing. Or zoning policies in suburban areas making housing 2x bigger on average now than in the 1970s. [1]
Defining inflation as a function of supply distracts us from the real-world problems causing broad-based increases in price.
Purchasing power is a function of a whole ton of things, including supply chains. If goods require more inputs or are less efficient to produce that will increase their price. This in turn decreases the relative purchasing power of a dollar. This can happen due to all sorts of externalities, for instance a tax. Or it can go down due to efficiencies in manufacturing technology or biotech. Or, a massive global pandemic leading to supply chain disruptions can cause prices to go up. Or housing can become more expensive because of zoning rules.
The "supply of currency units" is a fundamentally inadequate measure to capture this. It is too simplistic. Nobody takes it seriously except for a small group of very vocal online crackpots because it is so obviously unfit for purpose. [1]
We re-defined it as our understanding grew. The way we update practically any model in the face of new evidence.
Japan single-handedly demolishes the Austrian model. Their M2 supply grew 3X from 1990 to present but inflation remained 0% measured over thirty two years. Prices did not change from 1990 to 2022. [2, 3]
Yes you are. Watch how i can simplify it for you...
> The idea that inflation is anything other than an increase in the supply of money is an intentionally confounding theoretical device with no basis in reality.
> An increase in supply is not a debasement. That is measured post-facto based on its impact.
An increase in supply is always a debasement.
It's true that you might see the following chronology:
1/1/2020: value of the currency measured
6/6/2020: supply of the currency increased
1/1/2021: value of the currency measured; it's higher than it was last year!
But that doesn't mean the issue on 6/6/2020 wasn't a debasement. It definitely was, and the reason it doesn't look that way is your very low-resolution measurement of value. If the supply increase hadn't happened, the value on 1/1/2021 would have been even higher.
An increase in supply alone isn't debasement. A higher supply doesn't imply a lower value, because what you do with that new supply matters. If you mint a $10T coin and throw it under your mattress, then you haven't decreased the value of anything even though the supply has increased dramatically.
This is why we measure, and why Austrian economics fell out of favor decades ago.
See Japan for a concrete example. [1, 2] Their M2 money supply is almost 2.5X higher since 1990 but their CPI is dead flat over the same time period. It's actually seriously problematic for them.
> If you mint a $10T coin and throw it under your mattress, then you haven't decreased the value of anything even though the supply has increased dramatically.
How has the supply increased in this scenario? What if, instead of minting the coin, you just tell people that you've done so?
The supply of money has only increased if you're able to spend the putative addition to the money supply.
You can tell them all you want, but as Japan shows us, it doesn't actually matter. What matters is what you do with the supply which is why we measure.
Are you asking how supply works in my hypothetical, simplified example where the point I'm trying to make is that new supply in isolation doesn't matter - what you do with it does?
Or as you asking how it happens in the real-world example of Japan, where their supply increased from 400000B JPY to 1200000B JPY between 1990 and present, while everything remained the same price? And how this is seriously problematic in their economy?
You claimed that minting a coin with face value $10T increased the money supply. I'm saying this is not true, because that coin cannot be spent and therefore doesn't contribute to the money supply. It doesn't matter what you write on the coin.
What matters isn't what you do with "money"; it's what you can do with it.
Again, Japan proves you wrong and me right because they 3X'd their money supply and prices stayed exactly the same for 30 years in real and notional terms. Austrian economics does not explain that. Which is why we don't use it.
Tripling the money supply cuts the value of money by a factor of three. Without any exceptions. There is no other possible outcome. That's not even an Austrian idea.
But there are other things that affect the value of money. Tripling the money supply and seeing the value of money stay constant tells you that something else was pulling the value of the yen up at the same time that additional supply was pulling it down.
> Tripling the money supply cuts the value of money by a factor of three. Without any exceptions. There is no other possible outcome. That's not even an Austrian idea.
This is not true, though, haha.
Which is why the Austrian model, which only takes into account the former, is obviously and woefully incomplete - and has been rejected.
I guess you didn't get the memo. The US abandoned the gold standard in the 1930s and with that the US dollar became a fiat currency, i.e. a currency that isn't backed by anything. A fiat currency cannot be debased because it has no "base".
Not really bailing out retail. There was enough liquidity for retail users to exit the tokens at risk without a penalty.
On the other hand the VCs themselves that are large owners of the tokens in Solana ecosystem would incur large losses, and that's excluding additional losses from reputation in future. It just shows how successful Jump VCs are when they put up $320M in a few hours. Maybe a month of their PnL?
I don't see how this is an indicator of that. They didn't put in USD. They put in ETH. Which is a thing that has no requirements to be backed by fungible legal tender reserves. So, they're not actually putting up cash as a replacement. It's more like they're putting up assets as a replacement, but it's not even that concrete really. They're not the same thing.
They're trading in chits, not money, when things like this happen. At least that's the case for as long as you can't regularly and commonly transact in ETH. The spot price/value of ETH multiplied across all the ETH that exists doesn't seem to be a description of total USD (or EUR or whatever) reserves available to convert ETH to USD, et al. as far as I can tell.
The point I'm making is that this says absolutely nothing about their ability to eat a $320M loss because they didn't eat a $320M loss if what they put up was ETH because they can't transact in ETH, they don't fund their operations in ETH, they don't pay their LPs returns in ETH, etc. etc. etc.
It might well be that they can eat a $320M loss on the regular, but if so, this situation isn't any kind of indicator of it.
There's precedence for this in the crypto space as well. In 2017 Coinbase famously reimbursed everyone [1] impacted by an ETH flash crash that pushed the price from $320 to $0.10.
They aren't doing this because it is the morally right thing to do. They are doing it because they feel that the $320m is important to secure the value of their business, the Solana ecosystem (thanks for the correction arberx), and crypto in general.
My personal interpretation of that, there are a lot of awfully rich people who are scared of the bubble popping.
Nothing happens in finance because it is "the morally right thing". It's all a game of incentives. Wall Street Banks take disproportionate risks because they are incentivized to do so.
The interesting thing here is how the un-bailout-able nature of ETH affects the players in Crypto. Because ETH can't be magically printed, the VCs have to decide if they will walk away or bail out the retail end users. It looks like they decided to do the latter.
This has happened more than once in Crypto - I can think of the Binance hack, where Binance bailed out the users. OpenSea has also been covering ETH lost by its users who had their Bored Apes stolen because of user mistakes.
I wonder what it is about Crypto that causes large players to cover user loses. I need to learn more.
> I wonder what it is about Crypto that causes large players to cover user loses.
The answer is in the comment you replied to:
> there are a lot of awfully rich people who are scared of the bubble popping.
The value or cryptocurrencies depends on hype and on convincing the next chump that they should buy in. The large players have a lot of money invested which they will lose if the cryptocurrency value tanks because people lost trust. Covering user loses is itself an investment; it contains the damage by making the issue die down.
Exactly, this move tells us that the people behind Wormhole think that $325m is the lower bound for the risk to their previous investment if they didn't act. That means they likely have billions at stake in which they fear losing or like I originally said they are worried it is a bubble that might pop.
Were the 2008 bank bailouts done because it was the morally right thing to do or because they felt like it was important to secure the value of the economy.
It seemed like there was a lot of awfully well resourced individuals that were scared of slipping into a depression
>Were the 2008 bank bailouts done because it was the morally right thing to do or because they felt like it was important to secure the value of the economy
Both. It was done to preserve the value of the overall economy. That impacts everyone at every level of society and therefore it was the morally right thing to do. You can argue that the specific action taken wasn't the most effective approach, but the goals were noble in 2008. The goal here is that these rich people don't want to lose their investments.
Not meant as an attack on the parent comment but I've been interested in the concept of judging things by inputs versus outputs. I see aspects of this in many controversial subjects; particularly homelessness. Different groups of people seem to focus on one side and ignore the other side of the equation when making arguments. These groups just end up talking past each other then and don't make progress towards a consensus.
I'm curious what kind of research (or keywords to search for) there is around this topic. Is it just a morality thing or does it go beyond that?
Government does not invest a limited pot of money like 'savings', it conjures up money out of nowhere and can deploy ulimited amount of capital. The only limit on this activity is literally breaking the economy, causing inflation, etc,
If you propose we dump that money in education, well, we should, but it does not mean we should not bail out the banks - these two problems do not compete for same resources.
Sure. The GGP tried to say the bailout was an investment with profits though. It's not as simple as "They got low returns so it was a bad investment", but it's also not as simple as "They got returns so it was a good because it was an investment."
Even if you accept the amazing, faulty premise inherent in this comment (see the other response for more on why one shouldn't), the timeline is misleading.
For example, TARP (about $475bn) was more than 93% recovered by the end of 2012. The bank-related programs had already over-recovered $23bn versus the $245bn disbursement by that point with approximately a 4% internal rate of return.
Not to mention the inflation rate between 2008 and 2010 was -4% and then 0% for a hot minute thereafter. Factoring that, plus the 4% nominal return, meant that the programs yielded something like 8-10% annualized real returns.
Not if you consider that the return was a nice side effect of also not crashing the world economy. Not every "investment" is just about making money, this one just had the nice side effect of not costing it as well.
This is a commonly repeated trope that is completely false and based on very questionable accounting. Namely the omission of opportunity cost and the comparison of static parameters to temporal parameters.
What do you think that paper actually says? I keep seeing it cited as "no, this is how much the bailouts really cost!", but that's not what it's about at all and anyone who has actually read it cannot credibly come to that conclusion.
It's about assessing the fair value of the bailout programs, at the time they were executed - i.e. the estimated net present value of the future cashflows under the bailout programs. The author argues that it unhelpful from a policy perspective to do an ex post analysis because it only describes what happened in this case, rather than what could've happened. i.e. when considering whether a bailout is good value, we should consider what happens if its unsuccessful.
There is absolutely no doubt that the bailouts have been profitable for the government in terms of actual repayments.
"Drawing selectively on existing cost estimates and augmenting them with new calculations, I conclude that the total direct cost of crisis-related bailouts in the U.S. was on order of $500 billion, or 3.5 percent of GDP in 2009. [...] Those conclusions stand in sharp contrast to popular accounts that claim there was no cost because the money was repaid, and with claims of costs in the multiple trillions of dollars."
From 3.1.3. See Wall's analysis of Fannie Mae and Freddie Mac for more detailed discussion of their bailout costs:
"Treasury collected $147 billion from Fannie and $98 billion from Freddie. As explained earlier, interpreting this tally as a cost measure is conceptually flawed for several reasons. Wall (2014) also discusses the shortcomings of this approach, which has been used to argue that the government has been more than fully repaid and that value should be returned to the shareholders."
From the conclusion:
"Nevertheless, the total is large enough to conclude that the bailouts were not a free lunch for policymakers as some have claimed."
What the paper is saying seems pretty clear to me: bailout costs have been inaccurately measured and reported popularly at both ends. It was neither unfathomably expensive, nor profitable to the tax payer.
If you lend me $100 and I pay you back $107 you can declare you profited from the loan if you literally only look at the principal and repayment amount, but finance is not so simple, especially at a national level. Opportunity cost, inflation, depreciation, and numerous other factors exist. The total cost of you lending me $100 could have been significantly more than $107.
I invite you actually to read the whole paper. Please pay attention specifically to section 2.1 where the author contrasts "fair value", "ex ante" and "ex post" approaches to direct cost estimation.
The paper says that you cannot look at a successful bailout and conclude that it must have been good policy, because success was not guaranteed; you instead need to look at the range of outcomes that are reasonably possible to estimate the likely costs.
The author doesn't at all say that the "ex post" account of actual cashflows is an inaccurate measurement of what happened; only that it doesn't represent a useful policy tool for estimating whether other bailouts represent good value.
Section 2 is literally the basis of my original point that declaring repayment as profitable to the tax payer is inaccurate accounting of costs. I've read the entire paper. I'm not sure why you're so bent on ignoring plainly stated facts that align with my contention that the bailouts were not profitable to the tax payer. They weren't. It's explicitly stated.
"At 3.5% of 2009 GDP it is a cost that is big enough to raise serious questions about whether taxpayers could have been better protected."
It even directly states that citing the propublica bailout tracker, which the root comment does, as evidence of "profit to the taxpayer" is deeply flawed and one of the reasons the paper is addressing the issue. This is the entire reason I cited it
"The press typically reports bailout costs on an ex post cash basis despite the problems with that approach. For example, ProPublica, a highly regarded non-partisan news organization, created a 'Bailout Tracker' that has been keeping a running tally of government asset purchases and cash receipts under TARP and from the bailout of Fannie Mae and Freddie Mac. In their most recent update dated September 27, 2018, they report a total net government 'profit' of $97 billion. Policymakers also tend to cite ex post cash results. For example, in 2012 former president Barack Obama claimed that, 'We got back every dime used to rescue the banks.' Other media outlets report skepticism about such claims,7 but news organizations generally lack the financial acumen or resources to produce credible cost estimates of their own."
You're not going to force your flawed interpretation onto me and convince me the author is not stating exactly what she's stating plain as day, and has reinforced with subsequent work and commentary. That's called gaslighting
“My analysis imposes the discipline of a fair-value approach, which incorporates the uncertainty about the size of eventual losses at the time assistance was extended and the cost of that risk. By contrast, popular accounts simply add up realized cash flows or tally total risk exposures.”
As we look back, there is no uncertainty. We know what happened. The bailout was successful (within its parameters) and was more than repaid. You don't need to do any counter-factual analysis to show that, you can just go look at the reports to Congress from the Department of the Treasury.
To understand that paper, take an analogy from gambling.
Say I plan to play roulette; I'm the U.S. government, the bet is the bailout. Let's just assume I'm going to bet $1 on red.
I want to understand the cost of the bet at the time I place it; this is the fair value of the wager (bailout). The odds against winning a bet on red with an American roulette wheel are 1 1/9:1 and the payout is 1 to 1 - so the expected (fair) value of the bet is -$0.053. The author attempts to do the same for the bailout, bearing in mind the uncertainties, and comes up with -$500bn.
Now, at the roulette wheel, the expectation that I'm going to lose out $0.053 needs to be balanced against the excitement and pleasure of the wager. In the bailout case, the fair value of the bailout needs to be balanced against the anticipated broader economic results of the intervention like containment of the credit crisis and the shoring up of the mortgage system.
We spin the wheel and it's 32, red. We're lucky and so we win back our stake plus another $1. In the case of the bailout, the intervention was successful, the economy recovered, and the bailout money was more than repaid.
The popular account that the author alludes to corresponds to looking at this bet and saying "betting on red was obviously the right thing to do because I made 200% of my money back and I had fun gambling". The author isn't disputing that the bailout was more than repaid (she stipulates that in the abstract of the paper!), or that the economy rebounded. She is absolutely right that this is the wrong way to look at the expected cost of a bailout in the future.
Fundamentally, from a finance/economics perspective, there is no incompatibility between saying "the fair-value cost of the bailout was $500bn" and "the government made billions of dollars on the bailout". That's because the definition of a cost requires an analysis of the expected return. You do agree with this, right?
The original comment stated that the bailouts have been profitable for the taxpayer and cited the ProPublica bailout tracker as evidence of this.
I said that they have not been profitable to the taxpayer. I pointed out that the conclusion that they've been profitable to the tax payer is based on flawed cost accounting methods and cited the paper.
In the paper, the author very explicitly stated it was not profitable to the tax payer, directly calls out the misleading nature of the ProPublica tracker, explains why it's misleading, verbosely explains and justifies a more accurate cost accounting methodology, describes the results of using this methodology, and commentates on how these results and the methodologies that produce them may be used in the future to make more accurate and less misleading cost assessments of bailouts in the future.
I've directly quoted the paper numerous times in which the author clearly states that the bailouts were not profitable to the taxpayer, flaws in methodologies that indicate they were profitable to the taxpayer, and why different methodologies are needed that more accurately reflect whether the true cost of a bailout results in a situation that is profitable to the taxpayer.
In conclusion, and to reiterate my original point. The bailouts were not profitable to the taxpayer except when using deeply flawed cost accounting methodologies such as ex post cash flow analysis, which the author, in great detail, explains is a woefully inadequate for measuring the cost to the taxpayer of a bailout.
In fact because it is most likely that a recession will be followed by a recovery, it is probable that the government will show a “profit.” However, bailouts are costly because of the possibility of relatively unlikely but very costly states of the world where recessions persist and recoveries are low.
As I think we can agree, it was not the case the 2008 recession was persistent with low recovery; yet it is the possibility this could have been the case that increases the cost.
Cost analysis is absolutely orthogonal to an actual accounting of profit and loss, which is why the author consistently uses quotes around the word "profit". The cost of doing a thing has nothing at all do with whether it turns out to be profitable! Profitability is exactly a matter of ex post cash accounting; there is just no other way to measure it.
I guarantee you have never quoted a section of the paper that says the bailouts were unprofitable to the taxpayer because the author never makes that claim: because it would be false. You will also never find a reference to "cost accounting" in the paper, again because those concepts are orthogonal within the author's framework. By all means double-check the paper on both those points.
If you're trying to answer the question "did the tax payers get back more money than they put in to the bailout", then the only way to do that is by ex post analysis of cash flows: the answer is "yes they did". If this were a business, that would be the definition of a profitable investment.
Until you understand that costs are nothing to do with profitability, you're doomed to misunderstand this paper.
"The government earns a 'profit' from the bailout of -$200 + $210 = $10 million. Figure 3 illustrates the situation and makes clear its conceptual shortcoming."
"At 3.5% of 2009 GDP it is a cost that is big enough to raise serious questions about whether taxpayers could have been better protected."
You're just plain wrong mate. Taxpayers don't need to be protected from profitable ventures. I dunno what the hell definition for profit you're making up, but it's literally defined on the basis of cost in accounting and finance.
... "conceptual shortcoming" as a cost analysis technique, which is the subject of the paper. I literally just explained this in my prior post. Cost analysis can tell you nothing about profitability. Cash flow analysis can tell you nothing about costs.
Protection means "structuring the bailout differently to reduce the downside risk".
Accounting profit is literally revenue minus appropriate cost analysis. You can't determine profit without appropriate cost. That's the point of the paper and my contention. You're wrong. Stop gaslighting.
Cost means something different in economics from what it means in accounting. A cost in accounting terms is an expenditure. When an economist talks about a cost, they are talking about an opportunity cost, which is one that is contingent on the expected return of an activity. If you don't believe me, go read about it on Wikipedia or whatever.
Section 2.1.1 - "For a bailout cost measure to be economically meaningful, it has to be evaluated as of a fixed point in time. In most cases, the natural choice is the year the bailout is initiated, for instance, when new legislation is passed or administrative policy changes are announced or implemented, or shortly thereafter."
The author does this. She evaluates the cost of the bailout at a fixed point in time, the year the bailout is initiated, which is to say 2008. She arrives at a number of $500bn.
What happens after 2008 is irrelevant to her cost analysis. If you don't understand this, you don't understand anything about the paper at all. Look at every subsection in section 3 where the author considers the different elements of the bailout. When she's considering fair value cost, it's always in reference to contemporaneous reports (2008/2009 sources) or estimates on that basis.
Also, please stop accusing me of gaslighting: I'm not asking you to question your reality, I'm just asking you to question your understanding of an economics paper - there's no power dynamic here that would put you into a vulnerable position and allow me to bully you, even if that were my intent. We're just people on the internet.
I'm done here now, by the way, as there doesn't seem to be much more to say. If you have friends who have a strong background in economics, I really suggest you show them the paper, and this thread.
