The financial crisis as moneymaker

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Dan Gross pointed it out Friday, and the NYT joins in today: The government’s Troubled Asset Relief Program is starting to look like a moneymaker—or at least no longer like a giant hole into which money is poured. Meanwhile, the FT reports that the Federal Reserve has made a $14 billion profit on its various crisis-fighting loan programs. This is great! Let’s a have a financial crisis every year!

Actually no, let’s not. The other costs of the crisis—lost tax revenues, recession-fighting stimulus measures, etc.—will far outweigh any gains made on TARP or on Fed loans. And it’s still far from certain that TARP will end up in the black (the GM and Chrysler loans in particular still look quite risky). But the increasing likelihood that it won’t be a big drain on the government’s purse is an interesting and politically significant development.

It shouldn’t be all that surprising, mind you. By pouring money into the financial system when private investors would not, Washington was making an investment that was likely to pay off. It was doing what a good value investor would, buying into banks when banks were cheap (yes, it probably could have bought even cheaper if Treasury had tried to drive harder bargains with the banks, but that’s another story). The only scenario in which this investment would turn into a bust was a continuing collapse of the financial system—but by backstopping Citi and AIG the government had made clear that it would do all in its power to avert such a collapse.

With financial collapse averted, TARP is destined to be at worst a modest money-loser. Its real costs are harder-to-measure things like mixed-up incentives in the financial business and a reduced impetus toward financial reform. Then again, its real benefits are hard to measure too: How much worse would the recession have been without a financial-industry bailout in autumn 2008? You tell me.