I’ve read Bob Eisenbeis’ work for years and generally respect it even when I disagree with him. But his criticism of my recent article in Fortune and the Washington Post about the costs of the financial system bailout to U.S. taxpayers is wrong on both the facts and the numbers.
My article estimates the cash costs and cash income to the federal government—which I’m treating as a proxy for U.S. taxpayers—of the various parts of the bailout, including the relatively minor TARP, and the huge bailout of creditors of Fannie Mae and Freddie Mac, a/k/a the GSEs. My Fortune colleague Doris Burke and I include as bailout revenue the profits that the Fed has made on its bailout-related securities portfolio (primarily the QE1 MBS and QE2 Treasurys) and remitted to the U.S. Treasury.
The difference between the Congressional Budget Office cost number for the GSEs that Bob cites and the number that I’m using doesn’t involve cash, which he knows or should have known. Rather, it consists of the CBO’s estimate of the subsidy that taxpayers have extended the GSEs’ creditors by guaranteeing the debt without getting appropriate financial compensation for the risk to which taxpayers were exposed. It was made shortly after the government nationalized the GSEs’ in the fall of 2008, near the market trough. The subsidy cost is the proper way for the CBO to measure GSE expense for federal budget purposes. But in the summer of 2011, it’s not the right way to measure the GSEs’ cost to taxpayers. Throughout my article, I’m talking about taxpayer cash out, and taxpayer cash in. I’m not talking about budget impacts, or risk-adjusted rates of return. Just dollars out and dollars in.
Bob notes, correctly, that the CBO projected a budget cost for the GSEs’ post-nationalization book of business. But he doesn’t mention that the CBO (along with the GSEs’ trustee and the Treasury) predicts that the government’s net cash outlay to support the GSEs will decline in the future. A major reason is that the GSE’s post-nationalization business (for which, remember, the CBO assessed a budget expense) is running cash-flow positive. I was being conservative (in the accounting sense) by projecting the current $130 billion cash cost as the final cost.
As for the Fed, I’m calculating how much above-previous-trend the Fed has remitted to the Treasury from what it’s earned on its bailout related portfolio, primarily its QE 1 and QE 2 holdings. I’m also estimating how much the Fed will remit in 2011 and 2012. Of course, everyone who’s financially literate knows there are real problems—dollar devaluation, moral hazard, the screwing of prudent savers to rescue imprudent institutions—attached to these policies.
I’ve written about those aspects of the Fed policies many, many times, using lines like, “Thanks for nothing, Uncle Sam” about the impact of zero interest rates on savers. But in this article, I’m not talking my philosophical and political book, which in many ways probably isn’t much different than Bob’s. I’m just showing the numbers.
The Fed has traditionally remitted its surplus profits—consisting primarily of income on what used to be $700 billion to $800 billion of Treasury paper—to the Treasury. I haven’t researched the literature, but I don’t think there’s been much serious objection to this among rational analyst.
Now, the Fed’s portfolio is much bigger. And so are its profits, and its profits remitted to the Treasury. It’s the same way things have been for decades, just with bigger numbers. I’ve estimated the portion of the Fed’s 2007 (when the bailout of the world financial system started) through 2010 remittances attributable to its bailout activities, and have estimated the 2011 and 2012 bailout-related remittances. These aren’t any different than the 2006-and-earlier remittances, just bigger.
The article doesn’t praise QE2, of which I’ve been dubious all along, and doesn’t suggest (as Bob implies it does) that the Fed should monetise the deficit by purchasing all the debt the Treasury wants to issue.
My assignment was to write an article for a general audience about the taxpayers’ cost of the bailout. Much to my surprise, I came to realise that taxpayers are coming out ahead. Because I’m a journalist rather than an ideologue, I wrote what I found to be the case, not what I expected or wanted to be the case.
Having U.S. taxpayers coming out somewhat ahead in cash is a lot better than having them come out way behind, which many people believe (wrongly) to have been the case. Many of our numbers are estimates, as Doris and I disclose repeatedly in the article and accompanying financial data. But they’re consistent,
and they’re honestly arrived at. And we stand by them.