Andrew Sorkin and the Wrong Way to Think of the Recovery

|
 |  Includes: AIG, FMCC, FNMA, KBE, KRE
by: Rortybomb

This, from Andrew Ross Sorkin, is a wrong way to think about the financial bailouts and recovery:

Imagine the Bailouts Are Working…Every couple of months the Treasury Department takes a moment to strategically leak some good news about the bailouts. It happened again on Monday, when a Treasury official told The Wall Street Journal that America’s coffers would be only $89 billion lighter after all accounts were settled from the rescues, down from an earlier estimate of $250 billion.

It’s enough to make us all feel rich, isn’t it?

Inside the Obama administration, there are whispers of even greater optimism, with some officials suggesting that if the economic recovery continues apace, the bailout program could eventually turn from red to black.

TARP and much of the other money lent in the financial crisis has been paid back. I think it is important to remember that Fannie (FNM) and Freddie’s (FRE) losses are in part the effect of a shadow bailout on the biggest players. However AIG is looking better. So the financial crisis cost us nothing as taxpayers?

At a high level, and an important level, this is a bad way to think of the question. As Simon Johnson argues, the real cost of the financial crisis will be an increase in government debt of around 40 percentage points of GDP. James Kwak does some math here:

The 2008 CBO report projected that by 2018, debt held by the public would be only 22.6% of GDP. The 2009 report projects 67.0%, for an increase of 44.4 percentage points..What happened between those reports? The financial crisis and a severe recession. And if we want to prevent that from happening again, we need to reform our financial system.

Let’s take a look at a simple slice of those automatic stabilizers, regular (not extended) benefits paid out in unemployment insurance:

click to enlarge

The financial sector isn’t going to be paying that back. We are. I think it’s really dangerous to argue that since the financial sector paid back TARP, and even AIG might pay us back, we can assume everything is fine. It’s not. The collapse of the financial sector has put a massive strain on our finances and debt load. (As someone once told me, the only things that really destroy a country’s balance sheet are a war and/or a financial crisis. We’ve had a bunch of both lately.) It makes it critical that we get financial reform correct, because it would be very difficult to do this again in 6-8 years.

And as for the real question from last spring: would having put some of the banks into receivership last spring been worse in the short term, but better in the long run? Would it have been more equitable, less of an increase in the concentration at the top of the financial sector? Even better for taxpayers than what we currently have? And would it put into place a system that wasn’t looking to replicate the banking sector of 2007 going forward? The answer to these aren’t obvious, but they are incredibly important.