TARP Overpaid $78 Billion for Bank Assets

Moneymorning writes Watchdog Agency Says TARP Overpaid $78 Billion for Bank Assets:

The watchdog agency overseeing the Troubled Asset Relief Program (TARP) said Friday that the Treasury Department paid banks $78 billion more for assets than they were worth.

The Congressional Oversight Panel said the Treasury dispersed $254 billion for capital purchases of bank assets worth about $176 billion under the TARP program.

“The loss estimate is conservative,” said House Financial Services Committee member Rep. Alan Grayson, (F-Fla.). “It could turn out that those assets in the end are worthless.”

The $700 billion TARP program has been under scrutiny since it began in October because of a general lack of understanding of how the program is being run and where the money is going.

The congressional report is the latest in a series of revelations about the taxpayer-provided bailout money. An ongoing investigation by Money Morning has detailed how banks have used the first $350 billion: They’ve used the capital to finance investments in other banks and to pay bonuses to executives. Then they audaciously refused to say where the money went, or how it was used, Money Morning has shown.

The Congressional Oversight Committee detailed what the Treasury has spent so far in the TARP program.  In addition to the $194.2 billion spent on direct equity investments in banks, $40 billion funded a program to shore up American International Group, Inc. (AIG), $52.5 billion was set aside to stabilize Citigroup, Inc. (C) and Bank of America Corp. (BAC), and $20.8 billion was earmarked for Detroit automakers.

Neil Barofsky, TARP’s special inspector general, said in congressional testimony Thursday that he will ask companies to detail their planned use of the funds, including how they will comply with executive compensation rules. He will also ask the companies to document how the funds were used and to give the inspector general’s office accuracy certifications, Forbes reported.

“The most significant failing from a transparency standpoint: Understanding the process and criteria Treasury used to decide who would receive TARP funds and what the recipients have done with the hundreds of billions of dollars that have been invested,” Barofsky said.

The public’s stake in the nation’s banking system continues to mushroom as President Barack Obama’s team works to pull the economy out of the deepest recession in at least two generations. TARP, which is part of the $8.5 trillion the government has pledged to stabilize the economy, has guaranteed $350 billion to banks and the auto industry so far, with another $350 billion set to be allocated in coming months.

“Our money – and our economy – are on the line, and we all have a stake in the outcome,” Harvard Law School professor Elizabeth Warren told the Senate Banking Committee. Warren heads the five-member congressional oversight panel overseeing TARP.

So far, TARP hasn’t succeeded in clearing bad assets from banks’ balance sheets, which would allow the companies to lend money and get the economy going again, Gregory Miller, chief economist at Sun Trust Banks Inc. (STI), told Bloomberg News.

“It hasn’t cleaned up the asset side of bank balance sheets and it hasn’t helped bank uncertainty about bank balance sheets at all,” Miller said. “Uncertainty has now overwhelmed economic decision making.”

The lack of transparency has put TARP administrators on the defensive.  Neel Kashkari, appointed by the Bush administration to run TARP, on Dec. 5 told the Mortgage Bankers Association that the government isn’t “looking for a return tomorrow.”

“We are looking to try to stabilize the financial system, get credit flowing again, and over time, we believe that the taxpayers will be protected and have a return on their investment,” he said.

Indeed, former Treasury Secretary Paulson, who was succeeded last month by Timothy Geithner, originally promoted TARP as a possible moneymaker.

“This is an investment, not an expenditure, and there is no reason to expect this program will cost taxpayers anything,” Paulson said Oct. 20.

On a sidenote: The losses will be much more than 78 Billion. These are very optimistic figures, the final numbers will be much worse. Most of these assets will turn out to be completely worthless.

My comment: Yes, TARP overpaid. The taxpayer got screwed. Paulson was wrong with what he said on October 20th. Every single argument advanced in favor of TARP was wrong. Everyone who supported it was wrong. As it always is when scare tactics are used, all warnings went unheeded. Should this be a surprise to anyone? Of course not. This was the whole point of the bill. To screw over the taxpayer. What else should one expect? As I pointed out again and again, the people who supported it have been wrong consistently. Every single thing they had said was wrong. Why would it be any different this time? And they will continue to be wrong. But it won’t matter.

It is the same old song, again and again. When our leaders tell us that disaster is impending, we tend to stop thinking and give in to false emotions. When Paulson told us that it needed to be done “quick and clean” or else a “delay would put the economy at risk“, he had no logical arguments to support his thesis. But that’s the whole point. If you have no arguments you need to scare people to have it your way.

A failure to act, and act now, will turn crisis into a catastrophe and guarantee a longer recession, a less robust recovery, and a more uncertain future…

Sound familiar? This is yet another successful attempt to cover up a lack of logic and reason, and to appeal to fear and use scare tactics. This time it’s not George Bush or Henry Paulson fulfilling this solemn duty. It is Barack Obama.

Welcome to “Change”!

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The Coming US Tax Receipt Shortfall

The United States federal and state governments will be facing an unprecedented tax shortfall in the years to come. Declining corporate profits, asset values, and skyrocketing unemployment will cause the tax base to fall flat. It will most likely become evident in April of this year and get progressively worse in the years to come.

The common sense solution would be for the federal and state governments to once and for all abandon wasteful programs and departments and dramatically cut down on government expenses. Unfortunately this will not in any way be the consensus among Congress and the Executive Branch. They will see no other way out than to drastically raise taxes as a matter of “urgency” and “in the nations interest”. This bureaucratic intervention will of course do nothing but stifle growth and progress and thus have an additional adverse effect on tax receipts that will leave government bureaucrats puzzled.

Since it appears as though currently tax hikes are not feasible, the government will keep trying to finance the shortfall with a progressively increasing budget deficit.

Past recessions and depressions can give us an idea as to what the expected tax receipts over the next years might be.

  • From 1921 through 1923 federal tax receipts dropped from $6.6 billion to $3.9 billion, a drop of about 20% per year.
  • From 1930 through 1933 federal tax receipts dropped from $4 billion to $2 billion, a drop of about 17 % per year
  • From 2000 to 2003 federal tax receipts dropped from $2 trillion to $1.8 trillion, a drop of about 3.3% per year

The estimated receipts for 2008 are $2.5 trillion. It is save to assume that the upcoming tax shortfall will dwarf all precedents. But to make the outlook as optimistic as possible we shall assume a drop of just 10% per year:

Federal tax receipts will fall to $2.25 trillion in 2009, to $2 trillion in 2010, to $1.75 trillion in 2011, and to $1.5 trillion in 2012.

Meanwhile there is no indication that government expenses will fall. Even with the current, now completely obsolete, budget estimates for government expenses, the Federal deficit would develop as follows:

  • $850 billion for 2009
  • $1 trillion for 2010
  • $1.3 trillion for 2011
  • $1.7 trillion for 2012

These are very optimistic figures. It wouldn’t be surprising if actual figures turned out to be around double or triple those numbers, unless a true change in policy were to occur.

A true change would of course necessitate a complete, yet structured and well planned, abandonment of whole departments and government programs, including but not limited to Homeland Security, Education, Social Security, and Health and Human Services, along with a significant reduction of defense and military spending to sustainable levels around $100 billion per year.

This necessity has not reached the public in the slightest. Whoever utters it will be scorned as a neoliberal, callous, selfish miser who has nothing but his own interest in mind. It will take a complete collapse of this system in order for people to wake up to reality and listen.

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The Trouble with Bureaucracy

As explained, the objective of economic policy is to do whatever possible to enable the market to move toward market equilibrium in order to ensure that the largest possible number of individuals are supplied with the largest possible number of demanded consumer goods, given that the factors to produce these goods are always scarce.

Prices for consumer goods on the market enable entrepreneurs to understand which consumer goods are more amply or urgently demanded than others. Prices for factors of production indicate which factors of production, from the consumers’ point of view, could be employed in better occupations where they produce more or more urgently demanded goods.

The discrepancy between prices paid for factors of production and money earned from consumer goods sold is the entrepreneurial profit. It is the entrepreneur’s remuneration for enhancing the usage of productive factors based on what the consumers are asking for.

When the entrepreneur hires senior managers and directors, and when he divides his operation into different divisions, he still needs to ensure that every single one of his divisions contributes toward a profitable outcome. His directive to his subordinates will be but a simple one: Be profitable or lose your job. True, certain administrative and legal operations will by themselves not appear profitable, but the entrepreneur will need to keep those within limits and make sure the remaining operations more than offset these.

When a good is first offered on the market it will not be what the consumers were looking for. The entrepreneur and his entire business operation, in order to attain a desired sales level and reap a profit, will be forced to adjust and improve the good. Testing, fine-tuning, and adjusting attributes that pertain to the goods offered are indispensable steps in the production process.

The consumer himself, too, is not omniscient. He can’t tell the entrepreneur why precisely he dislikes or likes a good. He can merely decide to purchase or not to purchase. And when he uses the good he will either like it or not. And if he likes it he will come back. If he doesn’t he will abstain from further purchases.  It is up to the entrepreneur’s innovative and analytic capacity to deal with the consumer’s fancy to please him. The consumer is the toughest and most difficult to please supervisor in the supply chain. The ability to buy or not to buy a good gives the him the most powerful of all choices: the choice by action. The choice by action stands in contrast to the choice by voice. There is no more immediate and democratic vote than that of the unhampered market: every single penny counts and has an impact on entrepreneurial decisions. True, some people are richer than others and will have more voting power. However, this is only the case because they have been elected as representatives of other, less wealthy, consumers, by selling to them goods that they demanded, directly or indirectly.

Without price indicators and the ability to calculate profit and loss, entrepreneurs and consumers would be entirely at sea. All production would be mere guess work. Consumers could not be supplied as they desire. Factors of production would be squandered, misallocations and mass poverty would inevitably ensue.

Bureaucratic management has none of the above indicators at its disposal. Under bureaucratic management, money is taken via taxation from the consumers before they get to make a decision as to whether or not they want to purchase the good offered. The bureaucrat then, no matter how benevolent we assume he may be for the sake of the argument, faces an insurmountable task: He needs to spend the money obtained in order to usefully employ factors of production that produce goods which will be offered at no price since the money has already been violently taken from the consumers.

Without the ability to calculate profit and loss it is impossible for the bureaucrat to ascertain whether or not he is withdrawing factors from more urgently needed occupations and, from the consumers’ point of view, employing them in less urgent ones. To a certain extent, he will need to resort to mere guesswork. The merit of all his and his subordinates’ actions will have to be assessed by himself.

Under a constitutional government, the bureaucrat faces oversight from legislative bodies and parliaments. Those have been elected by the consumers via choice of voice. Without the simple and clear directive to make a profit, the bureaucrat will need to resort to other, even less perfect success measures. When he subdivides his operation, he can’t give his subordinates the simple directive to make a profit. Thus he needs to establish a set of meticulous rules, regulations, directives, and registers. He still has no idea weather his operation actually enhances the well being of society, but he tries to limit the potential damage caused.

As a result, the spirit of bureaucracy will swiftly permeate the entire operation. Success will be solely measured by strict adherence to the regulations established. Innovation and flexibility are done for. Adjustment to consumer demands will be impossible. Over time, as new bureaucrats fill the ranks of old ones, a more severe misuse of factors of production, if not already present, will become inevitable as the good intentions and ideas that stand behind the regulations established will no longer be grasped by the new officials in charge.

Thus economic policy, if it wants to attain its objectives, can do nothing but limit the extent to which matters are organized in a bureaucratic fashion. Since the main bureaucratic organization in any society is the government, this inevitably entails the limitation of the size of government and the scope of its intrusion into the lifes of individuals within the territory it oversees. So long as the government confines its activity to the protection of individuals against aggression and theft only little harm can be inflicted. Every expansion of governmental powers, however, will inevitably lead to a bureaucratic misuse of the scarce factors of production available, an increase in poverty, and a lower standard of living for everyone.

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Government Constraints

A government operates under constraints that are different from that of an entrepreneur.

The entrepreneur has no choice but to satisfy his consumers by withdrawing from the market factors of production whose output, directly or indirectly, currently satisfies fewer consumers than they are looking to satisfy or currently satisfies less urgent needs than they are looking to satisfy. The profit they reap is a result of the improved allocation of these factors of production.

A government obtains goods in a different fashion. It needs to obtain them via taxation, which is in last resort an act of theft against the individuals within its territory. But individuals in general resent acts of aggression. In the long run a government can’t just send its police to collect taxes under no pretense whatever. Violent upheavals by the governed and subversion would inevitably ensue after some time. This holds true for a dictatorship as it does for a democracy. In order to justify its acts of aggression a government needs the consent of the majority of the governed, it needs public opinion on its side.

Which means it employs in order to attain this objective cannot categorically be determined. Throughout history, governments have employed different justifications for its existence:

Throughout history governments across the globe have always appealed to fear of foreign enemies to justify its necessity. But in addition there have been subtleties in other areas: In ancient days government leaders would be anointed by the clerical class which had the greatest influence on public opinion. During the age of enlightenment, with the appearance of capitalism, the idea of using government to protect private property and individual liberties became popular. When in the 20th century the concepts of socialism conquered the hearts and minds of the broad majority, the idea of complete government control of the factors of production had become unstoppable and was swiftly put into practice virtually everywhere in the world. When the attempts of socialism had proven impracticable and lead to the collapse of the Soviet Union, the ideas of interventionism convinced the peoples of the world of the necessity of government bureaucracy. Minimum wage, centrally planned welfare programs, fiat money and subsidies for special industries became the norm.

Thus the main constraint for a government is the approval for its actions by the majority of the people. It will always do its best to mold public opinion to the extent possible. So long as it confines its activity to the protection of individuals against aggression and theft no major harm is caused. As soon as it begins to embark upon broader expansions of its bureaucracy, those who are governed by it need to be ever more vigilant and doubtful.

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Government Growth in the United States

(Check here for much better and updated charts regarding government growth.)

If there has been one consistent trend in economic developments in the United States over the past 60 years it would be the growth of the size of federal, state, and local governments in relation to the private sector.

The extent to which federal, state, and local governments in the US spend on the one hand and tax and borrow on the other hand has grown consistently. The best way to measure this is to take a look at the development of government receipts and spending as compared to total spending in the United Stated which is measured by GDP ( = Total Consumer Spending + Total Investment Spending + Total Government Spending + Exports – Imports):

US Government Expenses as % of GDP 1948 - 2007

As can be seen in the first chart above, government expenses as % of GDP in the US increased from 17.2% in 1948 to 31.5% in 2007. The second chart shows that taxes rose from 21.7% to 29.2% in the same period.

What is noteworthy that there was a brief period (1992 – 2000) where federal, state and local governments as a whole managed to cut its expenses as compared to the private sector from 33.4% to 29.2%. From 2001 through 2007, however, total government expenditures have once again grown consistently.

The fact that government expenses have grown throughout US history is hardly ever acknowledged or even mentioned in media outlets or by the responsible authorities. This is not surprising. For once one acknowledges it, the age-old myths about neo-liberalism, free markets on steroids, anarchy, merciless capitalism, or insufficient government funding would immediately be debunked and could no longer be utilized as convenient excuses by those in power.

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