$25B “Taxpayer Gain” From Mortgage Bailout

This story has a common fallacy. Every time I see this fallacy, I’m disgusted and offended. The Federal government “made a profit” of $25B on its “investment”/bailout in mortgage bonds. Do you see the fallacy?

The fallacy is that the “profit” calculation ignores cost of capital and ROI. The Federal government spent $225B in Q4 2008, for a “profit” of $25B in Q1 2012. That’s an annualized gain of approximately 3%.

A 3% annualized gain is horrible. True inflation is 20%-30%+ per year. State comedians look at the nominal profit and say “Hooray! The bailout was a good idea!” That shows complete economic illiteracy, ignoring cost of capital.

Instead of giving $225B to a handful of banksters, they could have instead used that money on infrastructure or a tax cut or lower inflation. It would have “stimulated the economy” more to give $600 to everyone, rather than give $225B to a bunch of banksters. The “advantage” of the bailout is that a small group of insiders profit.

If the banksters had to go door-to-door and steal $600 from each American, that would be obviously evil. Via inflation and taxes, the effect is the same. It’s “distributed costs and concentrated benefits”. The banksters had a *HUGE* incentive to lobby for a bailout. They spent a fraction of $225B lobbying for the bailout. The typical voter is powerless. A huge percentage of Americans opposed the bank bailout, but politicians did it anyway.

The politicians said “HAHAHA!!! We’re smarter than you! We’re voting for the bailout even though you don’t like it! Even if you vote against us in the next election, our opponent will also be a bankster puppet!”,

The banksters got to trade $225B of junky overpriced assets for cash. Then, they used 30x-100x leverage on that cash infusion, to profit even more.  The “value” of the bailout isn’t just the $225B cash infusion.  It’s $225B levered up with secret loans from the Federal Reserve.

There’s also the “seen vs. unseen” fallacy. Politicians can claim “Hooray! We saved the banksters!” You don’t see the other things that $225B could have bought.

Also, even if the bailout *WAS* a “successful” investment, it still was a ripoff. By definition, no other buyer was willing to buy those crappy mortgages at those prices. Even if they got lucky and made a nice profit, the bailout still was a ripoff.

The Federal Reserve was buying mortgage bonds as part of “quantitative easing”. The Federal Reserve has an unlimited budget. The Federal government may have sold those mortgage bonds to banks, who immediately flipped them to the Federal Reserve for a profit. There is no way to determine the “fair free market” price for those bonds.

Technically, the Federal government bailout was unnecessary.  The Federal Reserve could have directly bought all the junk mortgage bonds, without any public disclosure.  However, if the Federal Reserve flagrantly gave a secret big bank bailout, then Ben Bernanke wouldn’t have been able to talk on TV without laughing.

I’ve seen this fallacy cited over and over again. “The government made a profit from its bailout ‘investment’! Therefore, the bailout was a good idea!” That calculation ignores cost of capital, ROI, and inflation. By definition, no other buyer was willing to invest at those prices. The bailouts are corruption capitalism. Banks get huge direct and indirect State subsidies, and they spend a lot of money lobbying, pure corruption.  A negligible nominal profit made the bailout seem like a good idea. With high inflation, if the Federal government waits long enough, almost any bailout will show a nominal profit.

3 Responses to $25B “Taxpayer Gain” From Mortgage Bailout

  1. Anonymous Coward March 22, 2012 at 7:51 pm

    OK, a little off-topic but here are two videos that I liked.


    Notes: Jay Taylor comments on the correlation of the debasing of currencies and the decline of work ethics and morality. Smart guy. He has nailed the problem very concisely.


    Notes: See Ron Paul show the silver coin to The Bernanke. Then it cuts to an old black and white film. It would be funny if it wasn’t so sick.

    • Some of those “toxic mortgage bonds” were bought by FRE/FNM at a premium to fair market value, and then FRE/FNM were bailed out.

      Some of those bonds were bought by the Federal Reserve.

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