Has TARP cost $2 trillion or $23.7 trillion? Either way, it's outrageous

Has the U.S. spent $2 trillion or committed $23.7 trillion? Those will be the numbers tossed around at a House committee hearing today on TARP. As Special Inspector General Neil Barofsky will testify, the larger number is admittedly excessive, based on maximum government expenditure parlayed against a nonexistent return. Even so, Barofsky argues that his testimony isn't misleading.

Regardless of the ultimate cost of TARP, President Obama has declared that "the fire is now out" in an interview with PBS.

The ultimate problem is that the final costs of the TARP program are completely unclear. Everyone seems to agree that Barofsky's $23.7 trillion figure is ridiculous because he includes programs that were killed before they started or spending that is backed by valuable assets. For example, Barofsky's accounting assumes that:
* The government will push maximum spending on programs that already have been canceled or that never got underway.
* Every home mortgage backed by Fannie Mae and Freddie Mac will go into default and all the homes financed by these mortgages will be worthless.
* Every bank in the U.S. will fail with not a single asset worth anything.
* All the assets held in money market mutual funds, including Treasury bills, are worth nothing.
* The Treasury will default on securities purchased by the Federal Reserve.

In other words, Barofsky assumes a total collapse of the U.S. financial system and real estate market so that everything is worth nothing. This is, of course, not a very likely conclusion. To begin with, at least 90 percent of people are still current on their mortgages. Granted, 1.5 million homes are already facing foreclosure this year, but we are nowhere near a total collapse of the U.S. real estate market.

Of that $23.7 trillion, Barofsky estimates that $2 trillion has been spent so far and much of that is backed by assets that could be sold to repay the treasury in the future. That's still a huge number, given that the entire economic output of the United States is $14.1 trillion. That's 14.2 percent of our entire economic output going primarily toward bailing out the banks and fixing the financial mess.

Even with all that money spent, millions will be losing their homes. Thousands of businesses are near or facing bankruptcy and millions are still out of work. In this context, it's hard to understand how Obama can say that the fire is out. The analogy he uses in the PBS interview is that the economy "needs some new tuckpointing, the roof's leaking, the boiler's out, oh, and by the way, we're way behind on our mortgage." He said the work that remains will be undertaken with "limited resources" and will take time.

The ultimate question is, with trillions of dollars spent to save the banks, how much is left to do the rest of the fix-up work? Obama's tuckpointing, leaking roof, and broken boiler are the parts of the economy that primarily impact the everyday lives of middle America, but it seems that we may have already committed too much to the banks to help everybody else.

Lita Epstein has written more than 25 books, including Reading Financial Reports for Dummies.
Read Full Story