Why Government Bailouts Aren’t All Bad

There’s been quite a bit of spirited debate on the Rebellion about bailouts and federal debt, much of it inspired by Jim Bacon’s new book on the financial problems Baby Boomers will face.
In the heat of discussions, however, it seems that some key points are being lost.
As bad as government bailouts are, they often actually work. Governments can be a lender of last resort, loan money that buys time for repairs and then it is repaid. Life and the economy go on. It can’t be a long-term debt for the government since they are paid back.
There are plenty of examples around the world. One is in Sweden which fell into a severe financial crisis in the late 1980s. True Sweden has a lot more social programs than the U.S., making it quite different. The financial crisis had to deal with some complicated government borrowings related to the Swedish krona. One compex issue affecting the country’s currency was how West Germany managed merging its currency with that of East Germany which it was absorbing after the Sovit Bloc failed.
During the crisis, two of Sweden’s six largest banks, Forsta Sparbanken and Nordbanken, could no longer meet capital requirements required by Swedish regulations. Stockholm’s government bought Nordbanken and helped Forsta with loan guarantees. The government also picked up a failing bank, Gota Bank. The government ended up owning about 22 per cent of the country’s banking assets according to a report by the Cleveland Federal Reserve Bank.
Two asset management back, sort of “bad” banks, were set up to pick up the weakened banks’ bad loans, skirt regulations on a part-time basis, and inject equity in the troubled banks. They made it a gradual process to take pressure off short term prices. Within a half a decade, the country’s economy picked up sharply and most of the liquidations had been sorted through at a lower cost than originally fared. Crisis over.
Looking at the U.S.’s devastated economy, one can see signs of progress. Many folks hated the Troubled Asset Management Program (TARP) which spent nearly $800 billion buying up bad assets and injecting public capital into banks to prop them up in the short term. We will be celebrating the second anniversary of TARP this month.
So what’s happened since? A number of high flying banks have actually repaid their TARP money, according to Pro Publica. American Express returned $3.3 billion on June 9, 2009. Bank of America paid back $45 billion on Dec. 9, 2009. Goldman Sachs paid back $10 billion on June 9, 2009. On the same day, JPMorgan Chase paid back $25 billion.
To be sure, according to ProPublica, millions in warrants have to be sorted out. As part of the TARP deals, these give the U.S. government the right to buy bank equity at a set price. After the TARP loans are paid back, the warrants are either sold back to the company or auctioned off.
The point here is that when we all go running around with our adding machines figuring U.S. debt, one has to deduct the billions of TARP dollars that have already been paid back. I do not have a clear number to date. And as the Swedish example shows, sometimes a government can do the right thing by being a last-resort lender and a problem solver. It could very well be that Secretary of the Treasury Henry Paulson, followed by Timothy Geithner, and both George Bush and Barack Obama may have prevented a truly awful recession turn into the Second Great Depression.
We won’t know for some years if this was the case. In the meantime, let’s watch that deficit hysteria.
Peter Galuszka

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14 responses to “Why Government Bailouts Aren’t All Bad”

  1. I'm heartened that the "Gooze" has reminded us that TARPs, Stimulus and Bailouts are not only not unique to Obama nor the US – but are found, in fact, worldwide.

    In fact, in this country, we routinely accuse other country's of "subsidizing" their exporting industries.

    I think one can disagree with the concept – on the merits – on a global context but to drill down and claim that it's uniquely an Obama "socialist" concept lacks fidelity.

    In fact, when you get right down to it – the other countries are beating our socks off by not burdening their industries with health care costs.

    How can we compete against that?

  2. " The Senate advanced legislation to aid small businesses on Tuesday after months of Republican resistance.

    Two Republican senators, George V. Voinovich of Ohio and George LeMieux of Florida, joined Democrats in clearing a procedural hurdle for the bill by a vote of 61 to 37. That vote all but assured that the Senate will pass the bill later this week, and the House is expected to then put its final stamp of approval on the measure without delay."

    Now my question is this.

    Are the Republicans prepared to "rule" when 60 votes are required to pass legislation?

    " The Senate majority leader, Harry Reid of Nevada, said the small-business assistance bill that advanced on Tuesday, which supporters said would spur hiring, was “the most significant thing we have done since the stimulus bill was passed to create jobs.”"

    yup.. there's that word again – "stimulus" and as expected – opposition from the Republicans.

    Bacon says he wants a 3rd party but I bet you dollars to donuts come Nov.. Bacon is going to be pulling the "R" lever at the precinct, eh?

  3. If the Bush Tax Cuts are retained even for just the middle class – will they be renamed to be the Obama Tax Cuts?

  4. James A. Bacon Avatar
    James A. Bacon

    Your tax dollars at work:

    (CNSNews.com) – The National Institute of Mental Health (NIMH), a division of the National Institutes of Health (NIH), spent $823,200 of economic stimulus funds in 2009 on a study by a UCLA research team to teach uncircumcised African men how to wash their genitals after having sex.

    The genitalia-washing program is part of a larger $12-million UCLA study examining how to better encourage Africans to undergo voluntary HIV testing and counseling – however, only the penis-washing study received money from the 2009 economic stimulus law.


  5. Gooze Views Avatar
    Gooze Views

    Cheez. We all can find stupid examples like this. Give us a break.
    Peter Galuszka

  6. they were finding examples like this back when Roosevelt was President….

    " you mean we're going to hire a bunch of out-of-work immigrants to build roads and curbs in our National Parks?

  7. Bacon says he wants a 3rd party …….


    After yesterdays elections, he may have one.


  8. well.. with any luck .. a badly split Republican party like we see the Conservatives in Europe with a group that is fiscally conservative and a second group that is ideologically/socially Conservative….

    But Hey… count on the Republican Party to snatch defeat from the jaws of victory… at times…


  9. James A. Bacon Avatar
    James A. Bacon

    Speaking of Sweden, it is interesting to note that the Scandinavian country known mainly for blondes, Ingmar Bergman and socialism, has now surpassed the United States in the World Economic Forum's annual survey of economic competitiveness. What most people do not recognize is that although the Swedes still have a formidable social safety net, they are fiscally disciplined (as in, they live within their means) and they have a very market-oriented economy.

    The TARP program does seem to be one economic intervention that has worked fairly well. As Peter notes, many banks are paying back Uncle Sam.

    By contrast, the evidence is mounting that the "stimulus" bill was largely ineffective. And it is too early to see the results of Obama's "double down on real estate" subsidies for Fannie Mae and Freddie Mac. The situation there is not looking very promising.

  10. with regard to the stimulus – if you are a person that believes the stimulus kept us from an unemployment rate of 20-25%, then the stimulus was wildly successful.

    The basic problem is that you don't know what would have happened to the economy without the stimulus but we do have some clues – i.e. the tarp which kept businesses from going under – and they recovered and are paying back.

    Many economist believed that we needed to have even larger stimulus to get us back to 6% but it was considered politically untenable.

    The fact that someone was supposed to be able to accurately and precisely determine the exact amount of stimulus needed – to get guaranteed results is as laughable as those who cite it as an "example" of Obama incompetence.

    You know.. like we have a squad of Republican economists who could have quite easily decided the exact amount needed – if they were so inclined.

    We may never know what worked or what did not work but we do know this: tarps and stimulus are not Obama creations. They are readily accepted policy choices in every one of the industrialized countries – the G20.

  11. OK so try this. We routinely subsidize public education. Support for public education is practically a religion in this country, and yet:

    "Countries with a higher proportion of students enrolled in private schools score higher on internationally comparable exams taken by 15 year olds. Cross-national research published in the Economic Journal shows that competition from private schools improves achievement for both state and private school students while decreasing overall spending on education.

    For example, a 10% increase in enrolment in private schools improves a country’s mathematics test scores in PISA (Programme for International Student Assessment) by almost half a year’s worth of learning. A 10% increase in private school enrolment also reduces total educational spending per student by over 5% of the OECD average."

    from the Economic Journal

  12. with regard to the stimulus – if you are a person that believes the stimulus kept us from an unemployment rate of 20-25%, then the stimulus was wildly successful.


    The Arizona Republic is hardly a liberal rag, and it has been routinely flailing away against the stimulus.

    Today, the headline was "Stimulus Money to Boost Clean Energy Business in Arizona" and went on to say that th emoney had been bottled up for some time but was now fianlly going to be relased.

    No mention of the idea that the stimulus cannot and does not work, just gratitude for the $350 million or so they will get.

  13. money spent on direct employment of an individual or money spent on goods & services produces employment.

    the idea that stimulus money spent goes into a black hole that does not create jobs is ludicrous.

    It would be like saying when the US orders and pays for 5000 Humvees that it's also not a stimulus and also ..does not necessarily produce jobs.

    This is the same old Republican canard that taxes collected – go into a black hole – that they don't, in turn get spent to hire people and/or buy goods and services that,in turn, produce jobs.

    When the Feds give stimulus to a locality -that then spends the money on classroom chairs, school buses or adding insulation to the school – the Republicans claim that these kinds of stimulus are examples of what don't produce jobs.

    Just stating what the Republicans are claiming demonstrates how foolish it actually sounds but that don't stop them from going on FAUX News and saying that the Govt gave some locality a million dollars and only one job was created.

    The Republicans love the term left wing loon – a justifiable label at times, I'd agree but what the Republicans are saying about the stimulus not producing jobs is just as wacko.

    They are so wedded to their ideological party line that the real world is simply not allowed to intrude.

  14. PISA includes about 50 countries and not all of them are heavy into private schools. Many of them are thoroughly public schools but the main thing they all have in common is that 14 of them are ahead of this country in reading and math and science "literacy".

    It's important to understand what is meant by math or science "literacy".

    It means that not only can students regurgitate remembered facts – but that they can read and write competently enough to understand scientific and math concepts in real world applications and can themselves articulate real world situations that are based on science and math.

    That's important – because that's what today's "good" world class job requires.

    Blue Collar "assembly" jobs are more and more not only relegated to cheap labor economies but even in those economies – automation is replacing the cheap labor.

    Jobs today require substantial command of language and the ability to use language in modern technological concepts anchored in science and math.

    An easy way to understand what this is about is to go to any Algebra book and flip to the exercises at the end of each chapter – not the manual manipulation of equations – nope – the DREADED WORD PROBLEMS.

    In this country one or two are assigned as "extra credit" to only the more advanced students.

    In other countries – all the students -even those that are on a non-classic "technical" track have to do the problems not as "extra credit" but as a standard part of their curriculum.

    Here are the rankings.

    Read them and weep.

    Our school in this country – in a word – suck.

    reading – 15th
    math – 24th
    science – 21st


    and you know what?

    not a whimper about this from Republicans, the right wing and the Tea Party except complain that we're "dumbing down" by "teaching to the test".

    If Bob McDonald REALLY wants to do something about JOBS in Virginia – this is an area worthy of his efforts.

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