22 March 2011

Bailouts Were Cheap; Stimulus Was Expensive

The bailout programs of the financial crisis are turning out to be much cheaper than expected in the long run. Stimulus packages for the financial crisis so far have cost about $1,253 billion. All of the bailouts combined have cost taxpayers under $50 billion.

How costly were these programs?

* The total cost of all of the bailouts combined is under $50 billion.

* The U.S. Treasury Department is on track to make a $10+ billion profit on its controversial TARP (Troubled Asset Relief Program) bailout.

* The AIG bailout is on track to produce at $20 billion profit.

* "the Treasury said it had earned a profit of $2.25 billion on the sale of Citigroup Inc securities it received in exchange for a $5 billion guarantee on a portfolio of potentially toxic assets. The guarantee was canceled with no losses."

* The General Motors bailout is on track to cost the taxpayers $9 billion at the first GM IPO price, but could recoup its entire investment if GM shares reach $50 a share. The combined auto industry bailout cost was most recently estimated to be about $17 billion.

The U.S. would have lost $28.6 billion in spending on social services and missing tax revenue if not for the bailout of GM, its former lending arm and Chrysler Group LLC, according to a study released Nov. 17 by the Center for Automotive Research in Ann Arbor, Michigan.

* The FDIC has a reserve balance deficit of $8 billion, and expects to incur more losses in 2011, but this will be replenished from future insured bank premiums.

* The Treasury didn't lose money in its brief participation in the commercial paper market which is now largely terminated.

* The U.S. government did not lose money when it guaranteed privately insured money market funds that were breaking the buck because of their exposure to AIG, in the face of doubts about the capacity of private insurers to cover the loses.

* There are $30 billion of the $245 billion of financial crisis loans to banks still outstanding, but the program overall is on track to make a $20 billion profit, and most of the funds outstanding are owed by profitable banks.

One missing piece: The Fannie Mae and Freddie Mac losses to the taxpayers.

Incidentally, in most of the cases of bailed out companies, shareholders lost nearly everything and so did most non-priority bondholders.

How Much Did The Stimulus Package Cost?

The economic stimulus package was much more expensive.

The Bush Stimulus Packages

In early 2008, "President George W. Bush and Congress agreed on a $268 billion plan consisting mostly of tax cuts" and "the $158 billion stimulus bill signed by President George W. Bush in the spring of 2008."

The First Obama Stimulus Package

In February 2009, during the Obama administration, Congress enacted a stimulus package estimated to cost $787 billion (revised to $814 billion as of August 2010).

The final bill includes $507 billion in spending programs and $282 billion in tax relief, including a scaled-back version of Mr. Obama's middle-class tax cut proposal, which would give credits of up to $400 for individuals and $800 for families within certain income limits. It will also provide a one-time payment of $250 to recipients of Social Security and government disability support.

The bill contains more than $150 billion in public works projects for transportation, energy and technology, and $87 billion to help states meet rising Medicaid costs. Despite intense lobbying by governors around the country, the final deal slashed $25 billion from a proposed state fiscal stabilization fund, eliminated a $16 billion line item for school construction and sharply curtailed spending to provide health insurance for the unemployed.

In driving down the total cost — from $838 billion for the Senate stimulus bill and $820 billion for the House-passed measure — lawmakers also reduced the Senate's proposed tax incentives for buyers of homes and cars. The final agreement retained a $70 billion tax break to spare millions of middle-income Americans from paying the alternative minimum tax in 2009.

It also created a new tax credit for 95 percent of working families at a cost of $116 billion. To the administration's chagrin, this became the tax cut that no one noticed.

In retrospect, the tax incentives for buyers of homes and cars was highly ineffective. The Cash for Clunkers program cost about $3 billion and cost about $24,000 per addition car sale induced. The Homebuyer Tax Credit program cost about $16 billion (and the final total isn't in yet), which works out to more than $100,000 per additional home sold: “'We paid $8,000 to at least 1.5 million people to do something they were going to do anyway,' [think tank economist Andrew] Jakabovics says."

The Most Recent Stimulus Bills

Another stimulus bill was passed last week that included:

[A] $13 billion plan to give companies who hire unemployed Americans an exemption from paying payroll taxes on those workers through the end of 2010. It also provides a $1,000 tax credit to employers who keep new workers on the payroll for at least for 52 weeks. . . . The law provides an exemption from the 6.2 percent Social Security payroll tax for every worker who has been unemployed at least 60 days and is hired after Feb. 3 through the end of this year. Employers will get an additional $1,000 income tax credit for new employees retained for at least a year. The Senate estimated the measure will cost $13 billion over 10 years, though most of the cost will be in the first two years.


With the help of two Republican votes, Congress passed legislation that would create a $30 billion loan fund for small businesses and provide other tax incentives to encourage hiring and stimulate growth[.]

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