There's a diary on the rec list right now that contains an assertion to the effect that when the financial collapse struck, some $350B or so from drug dealers represented the only liquidity available, and thus "saved the banks." Aside from some logistical things (like how $350B that was not previously in banks was transported, etc.), it's worth noting that the bailout was of a much larger order, in the US alone.
The $350B seems very large in comparison to the TARP's $750B size. But TARP is a small part of a much larger bailout. Nomi Prins & Christopher Hayes have an excellent summary of the bailout and accompanying chart in The Nation. They are putting the amount of "liquidity" injected into the system at around $17.5 trillion.
Prins and Hayes write:
An August 30 New York Times article, "As Banks Repay Bailout Money, U.S. Sees a Profit," gives the impression that taxpayers should be happy to have made $4 billion on the deal, as if our checks were in the mail. But when the government became Wall Street's bank, it wasn't just $700 billion of TARP money that flew north to Wall Street. TARP was but a small fraction (roughly 4 percent) of the full $17.5 trillion bailout and subsidization of the financial sector. The details of this total bailout are complicated, but the basic mechanisms aren't beyond the average citizen's grasp. We're going to walk you through it.
In the rest of the article P&H explain the general structure of the bailout. It's worth revisiting their work now for the following reason: the initial TARP equity injections into the larger banks is in the process of being unwound. The Elizabeth Warren led TARP oversight panel is calling TARP a success and even saying it made a profit. In a narrow sense, that might be true, but the larger picture is more complicated.
P&H divide the bailout into five different activities:
- Capital Injections and Direct Loans. This is those "profitable" equity stakes in the banks and the various non-recourse margin loans to buyers of very crappy "AAA" paper.
- Indirect Loans and Guarantees. This covers the alphabet soup programs where the Fed takes as collateral stuff banks can't price or sell, turning them into actual money, and the credit protection the Fed and Treasury gave to new bond issues by the banks.
- General Backing and Subsidization. This covers miscellaneous guarantees of asset prices by the Fed and FDIC.
- Government-Sponsored Entities Help.The nationalization of Fannie and Freddie, plus the massive coordinated effort by many government agencies to prop up house prices (and thus mortgage backed paper) by replacing private mortgage lending.
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Global Market and Credit Expansions. The last bucket covers the giveaways to anybody who's willing to buy houses, cars, and other distressed products, in the hope the banking sector can create some less troubled assets.
I have some doubts these categories have entirely clean separation, but this list represents a very good coarse approximation to the bailout. The main point is that the total notional price tag, which is very different from the total final cost, is a lot larger than than TARP's headline number:
It also shows how hard it is to answer the question, How much did it all cost? The amount of money that's been floated, injected and dispersed in the ways we've listed above is $17.5 trillion. But what the final cost will be is not yet clear.
In other words, going back to the hook for this diary, those drug dealers were a small part of things, at best. (Aside: As of late, the total cost is looking to be vastly smaller than the total notional. However, a lot smaller than such a big number is itself a big number.)
P&H conclude with some discussion of the implications:
Another question our parable doesn't answer is, Where does all the money come from? Most of it has been "printed" by the Fed, which expanded its balance sheet and, in so doing, created money out of thin air. There's nothing wrong with printing money for the sake of keeping us from another Great Depression. In fact, not taking this step would have been disastrous. But the problem is how the money has been channeled. All that money was funneled through the banks; the real Joe and Katies--the actual households facing foreclosure and declining assets--haven't gotten much help. In fact, foreclosures are at an all-time high (7.5 million US homes are in foreclosure), and there have been 1.25 million personal bankruptcies this year through June (up 34 percent from last year). Unemployment continues to climb. The FDIC continues to take over failing banks. Credit has tightened, not loosened as all the pre-bailout rhetoric promised.
A fraction of the $17.5 trillion bailout could have been used to cut the principal of homeowners' mortgages (using homes, even devalued ones, as collateral) and cover student loans at zero percent interest. Rather than pouring it into the top layers--the banks--a people's bailout would have cost less and been more humane. And it likely would have prevented the ongoing increase in defaults, foreclosures and general economic anxiety.
I'm a little less convinced about the last conclusions. The way things have developed with respect to house prices suggests that to work, such an alternate bailout would have to be a nearly total loss, with the tab picked up by an increasingly un-progressive tax system. In fact, the current bailout is not totally unrelated to the P&H concept for the following reason: the final tab will depend a lot on the government's ability to manipulate the normative discourse in such a way as to shift the losses off the bailed out mortgage investors.
However, it's difficult to argue with P&H's wrap-up:
Given the banks' newfound publicly sponsored financial health, Washington has little incentive to rock the boat by proposing serious reforms. True, some necessary steps are being discussed by Congress: it's important to have a Consumer Financial Protection Agency to counteract the damage caused by lax oversight, and higher capital requirements so that banks can pay for their own risk fallout. But the Fed should not be the premier risk regulator, nor should we believe that it will cap extreme bonuses--President Obama doesn't even support a cap. Parts of the media are already reporting the end of the recession; Obama has moved to reappoint Bernanke, crediting him with keeping the country from a Great Depression, and has given tacit approval to the free flow of bank subsidies. The Treasury, headed by the man who was at the helm of the New York Fed when it nearly went down, is no less culpable for bad decisions.
Ultimately, the big decision not to restructure things as a consequence of the bailout was taken not long after the initial crash. The farther away from the Great Tanking we seem to get, the more remote the prospect of much in the way of substantial change becomes.
UPDATE: In response to some of the comments, I want to highlight the relationship between some numbers.
- $750B this is the size of TARP.
- $350B this is the theoretical drug dealer money.
- $17.5T this is the total size of the bailout.
- Unknown this is the total actual cost of the bailout.
Things to keep in mind are: (A) it really did require 17.5T dollars to stop the collapse; (B) if things hold, all but a small fraction will be recouped, so it isn't a total loss. It's wrong to say the size of the bailout was in the 100's of billions; it is also wrong to say the total cost will be nearly 20T.
UPDATE 2: Prins has an ongoing tally of the bailout here. (h/t) bobswern