Larry Summers and Finance

By James Kwak

I think some people didn’t understand the point I was making about the question of whether the government made money on TARP in my earlier post. Summers said, “The government got back substantially more money than it invested.” This is true, at least if you give him some slack on the word “substantially.” The money repaid, including interest on preferred stock and sales of common stock, exceeded the money invested.

My point begins with the observation that, as of late last year, the government had earned an annual return of less than 0.5%. My point itself is that it is silly to evaluate an investment by whether or not it has a positive return in nominal terms. You can only meaningfully evaluate an investment by comparing it to some benchmark. Saying that a nominal return of 0.5% is greater than 0% is meaningless, since the 0% benchmark is meaningless. Most obviously, it doesn’t account for inflation; since inflation has been about 1–2%, the government lost money in real terms.

But even saying whether an investment made or lost money in real terms isn’t very meaningful. You should at least compare it to the risk-free rate of return—the rate you could have gotten by investing in Treasuries. As I said in the post, if the government had instead invested in 5-year Treasury notes, it would have gotten an annualized return of 2.4%.

Actually, you should evaluate your investment against other investments of comparable riskiness. Preferred stock in big banks in October 2008  was pretty risky. If you compare TARP (which was concentrated in one very volatile industry) to investing in the broad stock market, the latter returned more than 18% annually.

And, really, you should evaluate investments ex ante, not ex post, by comparing the amount you paid to the at-that-moment value of what you were buying. And by that measure, the government paid high for preferred stock and sold insurance guarantees low.

It’s fine to argue that TARP was good financial stability policy, and that goodness more than compensates for the fact that it was a bad investment. I may not agree, but that’s plausible. But it’s highly misleading to talk about the government’s positive nominal return as a good thing without evaluating it the way you evaluate any other investment.

38 thoughts on “Larry Summers and Finance

  1. That’s how I read your blog but this post makes it even clearer, step by step. Thanks.

  2. The Federal Govt. does not ‘make money’ or ‘lose money’. It just adds to aggregate demand or subtracts from aggregate demand with fiscal policy. Or it props up or subsidizes certain activities — as TARP propped up the banking system.

  3. You doth protest too much methinks. Your prior analysis was succinct and clear. Stop being defensive in response to asses who ideology or self interest prevents them from seeing the obvious.

  4. The fear was the world was falling apart and you argue that while 100% of the money was returned the effective interest rate was insufficient? You sound desperate.

  5. I would have to agree with your argument overall as it relates to investing…but I think that the general comparison is flawed in this case. The government would not make any interest on a treasury as it would be the one paying the interest so that would be a zero sum game and the general stock market is not an option so I would not really consider it a valid comparison.

    I do agree with the overall point however. The goal of TARP was not to make money so trying to justify the original decision now by saying that it made money really does not strengthen the governments position.

  6. ‘I think some people didn’t understand the point I was making….’

    Or, they understood it all too well and thought it was foolish. And still do.

    Or can you tell us with confidence what the stock market would have done absent TARP?

    Also, kudos to anonymous for making the obvious point that paying interest to yourself hardly qualifies as investing.

  7. TARP worked in conjunction below-rate trillions being tossed out the Fed Window; and at what cost/risk that?

  8. But the bail out continued. Banks were, as still are, able to borrow from the Fed at super low rates. They can, and do, invest those funds for risk-less yet meaningful returns sometimes approaching 2%> It appears that little of this government lending is aiding taxpayers. Why not establish a similar program for them: notional accounts could be established in the name of each taxpayer that made less the $125,000 for couples, $75,000 for singles. Each account would be assigned government bonds, as they are issued, and loaned amounts at the same rate big banks pay sufficient to pay for the bonds. As the bonds mature, the government would be reimbursed at the original rate and the difference between that rate and the rate paid on the bonds at maturity would be credited/paid to the taxpayer. Taxpayers would have no access to or control over the accounts. The government would borrow the funds to make the loans to the taxpayer’s account little different than the current practice but structured in a way to benefit those most in need. No risk and probably the least expensive way to bulk up consumer finances.

  9. James, you are not looking at it from there point of view. By lending to corporations, the banks still make money and the taxpayer is aided by the new things he can now enjoy paying taxes on. That’s what they care about, and that what they legislated. Now if you were an investor, you could have a larger voice in helping the taxpayer, but would most likely jump ship and simply add another knife to the tool kit.

  10. I think it would add to your point if you can compare the return Warren Buffet had in Goldman Sachs vs. Govt investments.

  11. I do think James’ comments miss the point. TARP and similar programs were an absolute necessity, and would have been fully justified even if no TARP cash had ever been recovered. The alternative was too dreadful to contemplate. We collectively took the right decision in our collective self-interest. So, who cares whether the rate of return, measured as an investment, was paltry or not.
    Larry Summers on the other hand has quite different motivations. Through his, along with others’, massive mistake of being asleep at the helm, he had to break his non-interventionist principles and establish TARP. So, he has to justify that breach of faith by proving there was no cost in TARP. But come off it. The cost of his somnolence was millions of jobs, millions of foreclosures and an economy that has still not recovered seven years later. That is the cost of his failure we should be talking about. Who cares if he came up a bit short on his investment returns?

  12. Examine the Fed’s balance sheet which exploded since 2008, as trillions of dollars was printed out of the myst and funneled into the offshore accounts of the predatorclass and the finance oligarchs to buttress, bailout, and support the socalled Global Financial System. TARP is a drop in the proverbial bucket in government investments, bailouts, grants, and largess -, and while we can debate the governments alleged return on that singular operation, – the larger (multiple trillions of dollars) of government investment, largess, shedding, and advancement heaped upon and illicitly funneled to, the predatorclass and the finance oligarchs is by any calculus a massive, epic, catastrophic loss. Nothing has changed politically or economically. There is no real recovery for the 99%, though the predatorclass through buybacks, criminal speculation, and all the same idiocy and irrational exuberance, – and again – wanton systemic criminal activity is enjoying otherworldly capital gains and conjured paper profits.- the rest of Amerika, and the worlds populations are not recovering in any way, – nor is there any hope of a socalled “recovery” coming in the near or distant future. The predatorclass are magnitudes richer, – the 99% magnitudes poorer. Summers is a highly paid mouthpiece and spaniel of the predatorclass and the finance oligarchs the predatorclass own and control. Like other spaniels (“Similarly, FBI documents confirmed “a strategic partnership between the FBI, the Department of Homeland Security and the private sector” designed to produce intelligence on behalf of “the corporate security community.” A PCJF spokesperson remarked that the documents show “federal agencies functioning as a de facto intelligence arm of Wall Street and Corporate America.”) working in extraconstitutional ways to spyon, intimidate, incarcerate, exterminate, and otherwise silence any voice of dissent of disapproval of the newnormal dynamic of predatorclass criminal enterprises. The wanton robbing and pillaging of the worlds economies, nations, resources, and the brutal enslavement of the powerless unwashed masses here in the landofoz and globally continues unabated.

    The entire system is putrid and rotten to the core. It is a malignant, dysfunctional, fabricated, fascist system advancing the interests of the predatorclass and predatorclass oligarchs exclusively, while subverting and countermanding the peoples best interests at every turn. The socalled government no longer operates in goodfaith. The predatoclass and the finance oligarchs are criminal cartels perpetuating the most massive robbery and grotesque injustice in the history of the world.

    So Summers math, which is always suspect and dodgy is irrelevant. The socalled governments bailouts, buttressing, shielding, and naked advancement of the predatorclass and the predatorclass finance oligarchs is by any calculus a massive, epic, catastrophic loss!!!

    in a world where there are no laws – there are no laws for anyone predaroclass biiiiiiaaaatches!

  13. Nice to see Steve “Mr. Influidity” Waldman visiting the site. One of the better finance bloggers. That’s flattering to Kwak he can count him in his readership.


    How they still find data to cherry pick to support their “ism” is beyond me….totally making it up, or staging a situation like a musical production to generate “virtual” data…

    but then there are no boots on the ground (reporters) covering the “news”, is there? It’s a Grapes of Wrath scene out there – drive cross country…

    But let me get this straight, the nimrods don’t yet *know* what, universally among the human species, p-sses people off….????!!!!!

    Watch a couple of TV-‘xplanations from Larry and Timmy on CNBC as they “managed” the skinning alive of USA to cover their WAR LORD losses….

    What kind of imaginary unicorn-like creature do they think exists that will react to the social sadism of War Lords, left without loot other than their own citizen’s taxes,

    by breaking out into song?

    “…the sun will come out tomorrow….”

  15. Taxpaying citizens continue to pay for Secret Service protection of former First Lady, while she takes a $14 mil advance from the publisher of her recent book (tour) “Hard Choices.” She reportedly had “dozens” of Secret Service people at one of her book signings. She needs these “dozens” of Secret Service personnel at her book signing. She could not write them a personal check from her Goldman Sachs account ($400k) in light of her claims of being financially impoverished of prior years:

    Ref: : “In an interview Monday, Hillary Clinton claimed that when she and Bill Clinton left the White House, they were $12 million in debt.” “A senior at Washington’s private Sidwell Friends school, Chelsea, said to be an excellent student, will be among 1,600 freshmen entering Stanford next September. The college received 16,844 applications for 1997 and offered admission to 2,604, or fewer than 1 in 6. ….Tuition, room and board cost about $28,000 a year. Chelsea, who will live in a dorm, is unlikely to receive any financial aid; most Stanford scholarships go to students who can show financial need.”

    Ref: Placing their Derivatives bet on Hillary: “According to Politico, which covered the event, Clinton conducted a question-and-answer session with Goldman Sachs CEO Lloyd Blankfein. The investment giant declined to comment on the subject of Clinton’s talk, or why she in particular was invited to the events.”

    Ref: : “Hillary has been known to hurl a book at the back of the head of one agent driving her in the Presidential limo accusing him of eavesdropping, forget her ps and qs by never thanking her protectors and lob profanity-laced orders when she just wanted the agents to carry her bags – a job not on agents’ ‘to do’ list… ‘Stay the f**k away from me! Just f*****g do as I say!!!’ she is quoted as saying to an agent who refused to carry her luggage…”

  16. They’re too busy selling books, political fund-raising, and ignoring the will of most voters…..

  17. The point is that if the govt. has to step in as lender of last resort to essentially insolvent banks, it could at least make sure it got us taxpayers a decent return. If the govt. chooses NOT to get a decent return, it is not just trying to prevent conomic collapse, it is also making rich people (the banks’ owners, creditors, managers) even rivher by basically giving them money. There are two pieces here: A) saving the economic system from collapse; B) giving rich people money. Kwak is suggesting that you can do A without doing B, that the USG chose not to do it, and that Summers is trying to obscure the fact.

  18. – well CNN is cue-ing up “selling” Hillary for 2016 – the strategy is that they are never ever ever ever going to ask her about the ECONOMY. Let’s pretend she never cried the blues a few days ago at an ABC interview about being “broke” after 8 years in the White House as First Lady…

    Changing her mind about “same sex” marriage and changing her mind about going in to Iraq in 2003 – both changes are bona fides about her ability to grow in wisdom….?

    I know. Try not to hurl.

    She (Clinton) DID have enough “power” to FORCE a much longer discussion about the sanity of the Iraq invasion in 2003. She made her decision without a “Just War” discussion, AND IT WAS A MISTAKE, right?

    And now she wants to be the Commander in Chief that cleans up her “mistake”….WHY? And HOW? The financial devastation done to USA taxpayers is one of the criteria FOR having a Just War….POINT ONE, HILLARY and BILL – “…the DAMAGE inflicted by the AGGRESSOR on the nation or community of nations must be LASTING GRAVE AND CERTAIN…”

    Now that “mission” was accomplished!

    repetition works right? here AGAIN:

    from wiki – “….The just war doctrine of the Catholic Church – sometimes mistaken as a “just war theory”[15][16] – found in the 1992 Catechism of the Catholic Church, in paragraph 2309, lists four strict conditions for “legitimate defense by military force”:[17]

    1. the damage inflicted by the aggressor on the nation or community of nations must be lasting, grave, and certain;
    2. all other means of putting an end to it must have been shown to be impractical or ineffective;
    3. there must be serious prospects of success;
    4. the use of arms must not produce evils and disorders graver than the evil to be eliminated (the power of modern means of destruction weighs very heavily in evaluating this condition)…..”

    The WAR BOOTY from the Iraq 2003 “adventure in nation building” (after we found there were no weapons of mass destruction) WAS USA TAXPAYER $$$$, homes, savings and jobs. 480 people are worth a collective total of 2.08 TRILLION – which is ALL the wealth created by labor since the industrial revolution when counted in the value of the dollar back then….

    She got hers. Still not enough to cover the Grandkid’s college tuition….?

    The fact that NO ONE ELSE is being allowed by the Democratic machine to throw their hat in the Prez ring in 2016 until SHE makes up her mind is – well, what IS that, politically?! Is there a word for that kind of back room secret deal muscle? (I’m asking :-))

    Nothing remotely close to anything “political” that should be happening in a “democracy”, or even a “republic”, if you will…

    NOTHING else will “change” the trajectory of the Nihilism and anarchy and self-love of the GLOBAL bankster inspired “revolutions” other than a Nuremberg-like trial CLEARLY listing what “crimes against HUMANITY” ARE…..

    Think of it as a judicial “world cup” “let’s stop and watch it together” moment….hey, at least just THE IDEA of Russia and China (they DO HAVE THE POWER) setting one up STOPS COLD everyone’s holier than thou speeches….which is a GOOD thing

    yea, the “black swan” event IS out there…

    How many more murders would there be among the hoi poloi if there was no “police power” that takes YOUR life away (prison for life) if you go ahead and kill someone just because you can….? Congolese savagery “economy…

  19. Spot on with this write-up, I truly believe that this web site needs a great deal more attention. I’ll probably be
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  20. Yellin is tap dancing on TV and just admitted to “permanent damage” done to the long term unemployed.

    The FRB is a WORSE set of “managers” than the nimrods managing the GM ignition switch fiasco BECAUSE IT IS FIAT $$$$. Yes, THEFT of the FRUITS OF LABOR through FIAT $$$$ policy is “permanent damage” and WHO is supposed to be okay with leaving it as it is….????!!!!

    These people and their “language” are psychotically DELUSIONAL.

    Wiping out 40 MILLION people in their 50s is ECONOMIC GENOCIDE.

    The FRB needs to JUDGED by a Nuremberg-like GLOBAL trial for CRIMES AGAINST HUMANITY.

    This will not stand, Yellin.

  21. cut and pasted from the wikipedia discussion on “nihilism”:

    “…..Anton Chekhov portrayed nihilism when writing Three Sisters. The phrase “what does it matter” or such variants is often spoken by several characters in response to events; the significance of some of these events suggests a subscription to nihilism by said characters as a type of coping strategy…..”

    More misery for others = More $$$$ for ME ME ME

    That’s why nothing else matters….”permanent damage” (death,too, I guess) was good for ME ME ME

  22. Anyone else remember the “kickstarter” funding of one BILLION $$$$s given to the Brookings Institute during Obama’s first term for 4-5 people to review ALL the data collected by pharma/bio companies over – wha? 4 decades? – from AIDS/HIV patients in the hopes of finding something pointing to a cure that all those researchers over decades did not see in the data…?

    FYI – Every time data was slammed from one database to another over that same time frame, it was not copied correctly….one of those “glitches” that was never fixed and haunted even the recent website constructed for “Obamacare” enrollment….

    If the WORLD does not stop and define “crimes against humanity” for the people in the Middle East – hey, by all means chime in South America and Africa – EVERYONE’s “national interests” will be stolen by “terrorists”….

    Anyone fighting a war that is thousands of years old should only be allowed to fight it with stones and sticks….the LOGIC of sending more weaponry for people to steal – weaponry paid for with foreclosed homes (equity?) in USA is not a “beat the swords back into ploughshares” plan for USA to get back to “innovating” its way out of “permanent damage”.

    I want a report from Brookings – HUNDREDS of those researchers who originally generated the data also wanna know and have the time to “volunteer”….

  23. The entire global economic system is as of today based on the “good faith and credit” of the US government, and the creature from Jekyl Island, and the treasury printing trillions of dollars out of the myst and funneling that conjured wealth into the offshore accounts and capital gains of the predatorclass exclusively!!!! No one else anywhere on earth and certainly here in the land of OZ benefits from this insane and criminal enterprise. And the only reason this insane and criminal enterprise continues is the the dollars “reserve currency status”. The only reason!!!! Idiots. Amerikans live in gospel according to fox myst of propaganda, naked distortions, patent lies. The emerging economies, the BRIC, and even the Europeans are shouting the necessity for a new reserve currency. Current proposals call for a bucket list of currencies and commodities to replace the dollar (which the Fed, and fascists in the socalled government have destroyed by their insane and criminal economic bailout, favoring, shielding and printing policies, and insider predatorclass machinations, fictions, myths and naked criminal activity to buttress and enrich the predatoclass alone, singularly, and exclusively). The writing is on the wall, and everyone outside of the idiot pundits and complicit parrots in the socalled MSM and the fascists in the socalled Amerikan government KNOW as a CERTAINTY, – that the future of the global financial system WILL be base, NOT on the dollar, – but on a NEW reserve currency. We see these truths and facts born out in the Russia and China oil and natural gas agreement traded NOT in dollars, but in Renminbi. There are many other examples. Do you own googles and get back to me. The hard and terrifying fact is that once the world loose faith in the “Good faith and credit of Amerika”, investors globally will move to a new reserve currency (whatever thatmaybe) – and when that happens, and it is inevitable and certain, (because who or what in their right mind would hold faith in the insanity, dysfunction, systemic criminal machinations, predatorclass, fascists panjandrum and insanity that is Amerika today), – all bets are off. There will be an intelligent unraveling, and concerted global effort to replace the dollar as the reserve currency. The fascists in Amerika will not be able to stop this inevitability, because the socalled government is fascist and a predatorclass pawn, owned and controlled by this or that predatorclass interest, or oligarch and seeking the Pax Amerikana insanity of the warprofiteering and energy profiteering fascists in the bushcrimefamilycartels, and other oligarch cartels. The rest of the world will not suffer this criminal enterprise peacefully or quietly, and Amerika will pay the terrible price of loosing it’s vaunted and lynchpin “reserve currency” status. When that happens, there will be massive inflation in the Amerika because dollar will be worthless. See Germany in 1939, and Zimbabwe in the late 90’s early 2000’s. Amerika as we know will be savaged by the newworld reprecussions. Buckleup Amerikans!!! Put your trays in the upright and fixed positions. Because we are about to enter some turbulence. This turbulence will forever alter the face and future of Amerika and make the horrors of 2008, (when McCain, Bush, Cheney, Bernaki, and other fascists were pimping and bruting the hilarious fiction that “…the fundamentals of the economy are sound”) – look like a Disney movie. Idiots!!!! Fascists!!! Predatorclass shaitans!!!! You will get what you deserve. So, tragically will the dimwitted uneducated, gospel according to fox fed idiots and pathetic sheeple of Amerika.

    When the dollar looses it’s “reserve status”, Amerika as we know will come to a brutal, violent, and devastating end.

    In a world where there are no laws, – there are no laws for anyone predatorclass biiiiiaaaatches!!!!

  24. You guys seem to miss the real point here. Yes, he and we have been using influence and his strenght to meet his own goals for at least 100 years now. His behavior in Central America is so attrochis that some of the women and children of that region have been told that America will welcome you if you have a relative already there, causing people to literally walk until they reach a ranger who tells them that yes, you are in America. Where by they gratefully collapse into the arms of the ranger. He redrew the borders of Eastern Europe and the Middle East with the intention of extracting the mineral rights he willed himself and the money that goes with it, they didn’t understand his motives then, and they really don’t understand them now, now that it’s too late to reason with either one of them. In his quest to understand where he went wrong he goes off on a different tangent and then falls back to a defencive position protecting his interests to the death, preferably yours so he can keep his jones on top of every scene.
    You’re missing to many pieces of the big puzzle, to piece together your little puzzle and have others make any sense of it, you are basicly trapped in your own world with no way out, no good answers, and no hope except the times when it’s party on in search of the answer(s), but the party does end along with all the insanity, the question is are you prepared as there will be no notice or warning(s) of his coming, other than which is already seen.

  25. Well, poor Larry Summers. These are rough times for the incompetent. In a perfect world we would have WELFARE for bankers, and they would call it TARP. A former B-actor would call them ” ‘welfare bankers’ who drive around in Cadillacs” for campaign points with the illiterate. These are the things dreams are made of.

    But right now I’m worried about those poor chaps at FINRA.

    But really, those poor basturds at FINRA have it “so bad”. Their “suffering” is never-ending, as the “evil regulators” torture them everyday:

    Rumor has it if the “torturing” from regulators and “bureaucrats” keeps up much longer FINRA will have to “double down” on their slogan of the last 14 years:

  26. Well, you know what John McCain says….. “Industry SELF-regulation is the cure to all the nation’s ills” ——

  27. I can’t believe the blather – BLACKWATER et al (private contract mercenaries) were a BIGGER “army” in Iraq than the USA military – look it up if it hasn’t been scrubbed from the internets…you can see now that it is that GLOBAL mercenary army that is doing both – the Iraq and Ukraine “surges”….

    Unless the WORLD stops to define “crimes against humanity”, all the blather in the world will NOT stop these mercenaries and their looting of gold in Kiev and oil refineries in Iraq…

    The NWO is anarchy, nihilism and an economy based on “More misery for others = More $$$$ for ME ME ME

    The war booty for Blackwater, Mooseaide, and Kiev whackos is/was USA taxpayer $$$$…!

    There are NO good guys among the GLOBAL War, Drug and Slave Lords…

    And who has the authority and the moral and judicial RIGHT to deny the entire world of human beings a Nuremberg-like Trial to state clearly what are the NWO’s “crimes against humanity”?

  28. Your blog presents a pretty detailed account of almost every issue. Wish I could come more frequently here. User makes a hard hitting point though about Clinton.

  29. What kind of national conversation would USA middle class be ALLOWED to have with Presidential candidates (any and all) if Hillary Clinton is a candidate??!!

    IF she supposedly cares about USA, she would be promoting the advancement of OTHER qualified pols that she mentored into leadership positions – meaning who would SHE pass the baton to….? Besides her daughter….?

  30. In response to all the dumb Polack jokes going around today…musicals about “dumb” is unique to USA…

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