Remember the $700 Billion Toxic Asset Bailout?
Politics / Credit Crisis Bailouts May 17, 2013 - 09:52 AM GMTBy: Bill_Bonner
The financial news is getting boring. The Dow goes only one way – up. But gold fell below $1,400 per ounce yesterday.
Rather than trying to figure it out, yesterday evening we drove down to Zombietown. A friend in Washington had promised to introduce us to Neil Barofsky, inspector general of the TARP program.
You remember TARP? It was the feds' $700 billion program to rescue the US economy from a correction. Neil Barofsky was in charge of it. So we decided to go down and ask him how it turned out...
Meanwhile, in yesterday's International Herald Tribune was a small note: "Economists agree that spending cuts and tax increases have slowed the US recovery."
Readers will recognize this as the usual claptrap.
Government spending does not bring a genuine "recovery."
C'mon... how many times do we have to explain? You take $5 worth of resources and give them to an armed 19-year-old in Afghanistan. He shoots a round or two into a mountainside... poof... the $5 is gone. Or you have an ATF official. He's idling his motor as he stakes out a house believed to be used by a cigarette smuggler. In a few minutes, or even seconds, the $5 has vanished. Or give the money to a disabled person; he buys a MoonPie and a Coke. Economists may record the spending as part of GDP... But how are you better off?
You're $5 poorer, not $5 richer.
But GDP growth is something economists feel they can control. So they go to work on it like a sex maniac strangling a prostitute. Nothing good comes of it. But at least they get results.
And here comes Paul Krugman with more garroting wire! The New York Times Magazine:
Keynesian economics rests fundamentally on the proposition that macroeconomics isn't a morality play – that depressions are essentially a technical malfunction. As the Great Depression deepened, Keynes famously declared that "we have magneto trouble" – i.e., the economy's troubles were like those of a car with a small but critical problem in its electrical system, and the job of the economist is to figure out how to repair that technical problem.
Back to Neil Barofsky...
Rewarding Mistakes
So... where did the $700 billion go? Did that fix the magneto trouble?
"I wondered the same thing," he said (from memory). "It was amazing to me that no one knew. We gave it to the banks. But no one knew what they did with it. I proposed to Tim Geithner that we find out. He was outraged. He cursed me out, using the F-word. He said it would bring the whole banking system down, if I asked.
"I went ahead and sent out a letter. I didn't really have the authority or the staff to insist. But all of the big banks wrote back. And most of them gave me dodgy responses or gave me the brush-off.
"What did they do with the money? They were supposed to increase lending to help bring about a recovery. None of them did that. Instead, they used it to repay each other's loans. In other words, they used it to reduce the amount of credit available... not increase it. And they bought US agency bonds... just as you'd expect. And they paid out their bonuses.
"In other words, they looked out for themselves... just as you'd expect. I didn't know this information was going to bring down the banking system...
"The whole thing was so perverse, I can barely believe it. In a normal financial system, if a bank made a bad bet, it would pay a penalty. Counterparties might lend more money to it, but they'd want higher rates of interest to protect themselves.
"But here, in the bubble years, all the big banks made some of the worst bets in history... and what happened? The government stepped in... and lent them money... at lower rates of interest. They were rewarded for their mistakes. The good banks – that didn't have the backing of the government – actually paid higher rates of interest to borrow money than the bad banks.
"Another thing I wanted to know was exactly how much money was really at risk. We gave away $700 billion. But we also guaranteed loans... and gave lines of credit... and stood behind various financial transactions. I asked how much was at stake... how much was at risk. No one seemed to know. So we added it up. We found a total of $23 trillion. That's ‘trillion' with a capital ‘T.'
"Again, I'm not saying that we would ever have to pay out that much. Some of this was guarantees on top of guarantees and cross-guarantees... very murky... very difficult to disentangle. But I thought it was worth knowing how much we had at risk. And again, the banks didn't want to tell. And the people in the Treasury department didn't want to know.
"The more questions I asked, the more I found myself isolated... and at odds with the Treasury Department, as well as the banks. I was having shouting matches in the Treasury. The banks hated me. And then the undersecretary of the Treasury called me into his office.
"He explained that if I eased up on the banks, I could have a very nice career after the TARP appointment expired. If I didn't play ball with them, I would find it hard to find a job.
"That's how it works. You go along and you get along. If you don't go along with the scams and the technical mumbo jumbo... you're out."
That's how a zombie economy works, dear reader. The zombies throttle the girls. You look the other way. Or else...
Bill Bonner
Bill Bonner is a New York Times bestselling author and founder of Agora, one of the largest independent financial publishers in the world. If you would like to read more of Bill’s essays, sign-up for his free daily e-letter at Bill Bonner’s Diary of a Rogue Economist.
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