The Treasury Deparment sold the last of its shares in General Motors today, which concludes the auto bailout portion of TARP with something like a $10 billion loss. The bank bailouts, by contrast, made money. Some people feel this should have a big impact on our thinking:
For the record, government made money bailing out Wall Street, lost money bailing out car industry. But which industry does everyone hate?
— Ben White (@morningmoneyben) December 9, 2013
It’s a fair point, but I actually think folks are largely right to ignore the profit and loss issues. The basic reason is that due to the federal government’s extraordinarily low borrowing costs, it’s actually really really easy for the Treasury Department to make money as a value investor when it wants to. Treasury’s paying 1.5 percent interest on a 5-year note right now, which is a joke. Anyone could make money with that cost of capital. Just buy a diverse portfolio of high-rated corporate bonds and watch the coupons roll in.
But nobody cares that this would work for the exact same reason that the government’s cost of funds are so low: The government can print money!
That means neither the costs nor the benefits of the bailouts are well-summarized by looking at the government’s finances. In both cases, action was taken during a panic to prevent firms from being liquidated. In both cases, anti-liquidation action was justified by the concern that liquidation would spill over to other firms (auto parts suppliers, bank counterparties) in a way that would further depress economy-wide demand and cause further losses. You don’t need to buy that story in both or either cases (I have mixed feelings about it) but it’s just not a story about financial costs. If there’s a problem with the bailouts, it’s precisely that saving the firms rather than letting them die and be replaced by something else is a problem. The money isn’t the issue.
