South By North Strategies, Ltd.

Gretchen Morgenson of The New York Times explains the fuzzy math behind claims that financial rescue programs like TARP have made money for the taxpayers. One problem is the failure to account for the true value of the subsidies provided to financial institutions.

An even larger problem with the Treasury analysis, Mr. [Edward] Kane [of Boston College] said, is its failure to calculate the value of the subsidy that taxpayers provided to rescue recipients. “You would not pass Economics 101,” he said, “if you didn’t understand the opportunity costs involved in providing the subsidy.”
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The programs provided enormous amounts of money at below-market terms for extended periods, he said. Had those guarantees been priced at their true market value — what a private investor would have charged to lend during those dire days — taxpayers should have received far higher returns.
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Timothy G. Massad, assistant Treasury secretary for financial stability, said: “We believe the fact that we took strong, forceful action resulted in us preventing significant economic costs, including the risk of a second Great Depression….”
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Charles W. Calomiris, is a professor at Columbia Business School ….. He worked with Mr. Kane on the critique of the Treasury’s analysis and said in an interview last week: “Pretending that when providing these subsidies all you have to do is get your money back and not get an adequate return accounting for risk — that is not a good accounting for cost.”