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— It started out as a simple question.
How much money has the federal government thrown at the financial crisis since the recession first began over a year ago?
Exact figures remain elusive, like most of the way the government handles and accounts for money, and it's complicated by a simmering alphabet soup of programs aimed at revving up the economy. The bottom line also depends on whom you ask.
Turns out it would be easier to count the squirrels in Central Park than arrive at a precise answer.
So far, cash commitments made by various bailout efforts — including the Treasury's $700 billion Troubled Asset Relief Program bailout and various lending programs by the Federal Reserve — are just shy of $3 trillion, Neil Barofsky, special inspector general for TARP, told the Senate Finance Committee March 31.
But the net cost to taxpayers will be much lower — more like $356 billion in direct spending — according to an analysis published last month by the Congressional Budget Office.
An analysis by msnbc.com concludes that Congress, the Fed and government agencies have announced plans to spend $7.2 trillion to fight the economic downturn, with the vast majority of that coming in the form of loans and loan guarantees. (See graphic above.)
But the Fed and other agencies typically deflect any such attempts to total up the costs of the spending and lending.
At a March 24 House Financial Services Committee hearing, Rep. Michele Bachmann, R-Minn., demanded that Fed Chairman Ben Bernanke cite the constitutional basis for the central bank’s aggressive moves to stem the financial panic, saying, “This has been over $10 trillion that we're talking about.”
“I don't know where $10 trillion comes from,” Bernanke replied curtly.
The government’s response to the 16-month-old recession and financial panic has been as complex as it is vast. Dozens of separate programs and spending packages have been unleashed by the Fed, the Treasury, the Federal Deposit Insurance Corp. and other agencies. These programs fall into two broad categories: call them lending and spending.
Most of the lending, by far the biggest pile of cash, has come from the Fed. Created in 1913 after a series of devastating financial panics, the central bank was designed as the lender of last resort. Since the crisis began, the Fed has lent with a vengeance. But for each of the Federal Reserve notes (aka dollars) it has handed out, the Fed has taken back some form of collateral, usually a relatively high-quality bond—on which it collects interest.
That is, after all, what the Fed has done for the past 95 years. For most of that period, the Fed stuck to swapping cash for the safest debt securities — U.S. Treasury notes, bills and bonds. When the financial panic hit in September, lending all but dried up as panicked investors and bankers hoarded cash. The Fed responded by widening the type of securities it was willing to accept as collateral and began spraying money at the economy like a fire brigade trying to contain a five-alarm inferno.
Seizing on an obscure clause, Section 13.3 in the law that created the Fed, the central bank invoked virtually unlimited powers to expand its lending to “any individual, partnership, or corporation” when confronted with “unusual and exigent circumstances.”
The Fed’s use of that lending power has been prolific. When the crisis began in September, the Fed’s balance sheet — the accounting of how much it holds in investments against its cash loans outstanding — stood at about $940 billion. By year-end, that number had swelled to $2.3 trillion, fueled by an alphabet soup of “lending facilities” created at a pace and scope never imagined.
The Term Auction Facility, for example, expanded the list of lenders and the type of collateral accepted for cash. In normal times, the Fed lends only to an elite list of the biggest banks and “primary dealers,” which it uses as conduits to the wider financial system. Before long, the list would include a troubled insurance company and a failing investment bank that had made too-risky bets.
In normal times, the Fed’s main focus is the banking system. Before the credit panic hit, some 40 percent of lending happened outside the Fed’s purview in the “shadow” banking system.
That additional funding comes from investment funds, corporations, pensions, university endowments, wealthy individuals and foreign governments — anyone with a pile of spare cash looking to earn interest. In normal times these investors make their funds available by purchasing “asset-backed” bonds consisting of car loans, credit card debt, mortgages and student loans. But last September that “shadow” lending market all but dried up.
To get the market for these loans flowing again, the Fed stepped with the Term Asset-Backed Securities Loan Facility (TALF) as a buyer of last resort for these bonds. Starting with a commitment of $200 billion, the Fed would eventually pledge to buy as much as $1 trillion of asset-backed securities used to fund consumer lending.
The Fed also unleashed a series of other programs, some of which provided the desired calming effect with relatively little actual lending. Other programs have virtually been ended after having served their purpose.
That rise and fall of multiple lending facilities is one reason it’s tough to assign a grand total to the government’s cash commitments to the crisis. From its $2.3 trillion peak at the end of last year, the Fed’s balance sheet fell to $1.9 trillion in February. Since then it’s crept back up to $2.1 trillion. That part of the calculation remains a moving target.
For all its largesse, the Fed expects to get most of its money back when the economy and financial system recover.
Bernanke told Congress last month that some 95 percent of its loans are back by the safest, top-quality debt paper. The other 5 percent includes some risky assets put up by the now-defunct Bear Stearns and taxpayer-rescued American International Group Inc. (AIG). But even those loans will eventually pay back some of the Fed’s investment.
The Fed may even come out ahead when the crisis is over and it reverses all these loans, swapping the bonds it's holding back into cash. Though the central bank has pushed the short-term interest rates banks charge each other to near zero, the Fed doesn’t lend money for free. The interest it collects on the trillions of dollars it lends pays the Fed’s operating expenses. Any surplus goes to the Treasury to help pay for general government spending. So a true accounting of the financial bailout should add back the return on the Fed’s investment. This, too, changes from one week to the next.
What about the rest of our bailout accounting for the relatively smaller pile of money devoted to actual spending? Those figures are easier to nail down. What's less clear is how much of that money eventually will return to the Treasury.
The first major outlay came last year, when it became apparent that the economic slowdown called for some sort of government response. An initial $168 billion stimulus package approved by Congress was handed out largely in the form of tax rebates to individuals.
But a despite brief pickup in spending last summer, the economy continued to slide. When the credit panic hit in September, Congress and the White House reacted with urgency.
Warned by then-Treasury Secretary Henry Paulson that the global financial system was perhaps days from a catastrophic collapse, Congress authorized the Treasury to spend up to $700 billion to buy up mortgage-backed investments that bankers said were clogging up the system. And the
legislation directed the Treasury to spend tens of billions to help homeowners facing foreclosure who were sold dicey mortgages.
Neither of those plans materialized. After weeks of late nights and long weekends trying to devise a program to buy up “toxic” bank assets, Paulson announced a massive infusion of cash directly to banks in exchange for stock paying the government a dividend. That Trouble Asset Relief Program, or TARP, would eventually disburse some $240 billion to banks, many of which played a critical role in creating the toxic assets they were now unable to sell.
The TARP soon became a financial firewall against the spread of panic to other troubled corners of the credit system. Insurance giant AIG, with operations in 130 countries and over 100 million policy holders, announced it was on the brink of insolvency. Because one arm of the company wasn’t regulated, no one bothered to ensure there was enough money on AIG’s books to pay off all its bets.
With the aftershocks of the collapse of the failed investment firm Lehman Bros. still reverberating, Treasury and Fed officials said they had no choice but to put up billions in loans and TARP funds to keep AIG afloat. In the end, AIG received four separate government bailouts totaling more than $170 billion.
Once it became clear that TARP's original mandate to buy toxic assets had been abandoned, the ailing auto industry came calling for help. After years of a relentless rise in costs and sliding sales, the CEOs of Chrysler and General Motors flew to Washington on corporate jets asking for TARP money to tide them over. Before the Obama administration finally said “Enough” last month, some $17.4 billion in TARP funds had been shipped to Detroit.
When Congress reauthorized the second round of TARP spending, it made sure $75 billion was tagged to help homeowners in foreclosure. But instead of buying up mortgages directly and refinancing them, the program provides cash incentives to lenders who voluntarily step forward to offer struggling households more affordable terms.
The TARP program has had mixed success in getting credit flowing again. So far, there are few signs it has succeeded in getting the economy back on its feet.
So Congress and the White House decided in February to serve up another $787 billion in government spending. The hope is that much of the money will help fill the consumer spending gap left by millions of lost jobs and the twin collapses of the housing and stock markets.
Like all government accounting, tracking that spending is a lot harder than than balancing the family checkbook. For starters, that $787 billion represents spending authorized over 10 years, although most is likely to be appropriated in the first two.
Much of that money isn’t really spending; some $400 billion represents taxes that won’t be collected. Instead of just handing out tax rebate checks, this time the government is targeting tax breaks to those at the bottom of the income ladder, first-time home buyers or people who buy fuel-efficient, American-made cars.
As for the spending, the original intent was to find programs like building roads and bridges that would provide the biggest economic bang for each tax buck. It will be years before the full economic impact, and the size of the program, can be known. That’s one more reason the total tally is tough to nail down.
The biggest impact of the bailout — the size of the federal debt — may be easier account for.
When the recession officially began in December 2007, the total public debt outstanding stood at $9.149 trillion. As of April 1, 2009, the figure had risen to $11.110 trillion. The difference comes to $1.961 trillion.
Which is about as good an accounting of the true cost as any.
