In previous posts, my friend Jake and I were arguing over whether the banks would repay TARP money.  A few weeks ago, the banks wanted to, but the Treasury wouldn’t let them.  It looks like yesterday the government gave the green light for some of the banks to pay back the money.  It also looks like the treasury made $4.8 billion on the deal from dividends – not a bad reason to hang onto an investment.  We’ll have to see if Barack Obama takes credit for this relatively good news, despite the fact that Bush is largely responsible for this part of the bailout.  I say this news is relatively good, because now we still have a few problems that are a result of this initial bailout.  

These banks were able to pay back the money because they were able to raise capital.  They were able to raise capital, because there is a lot of money right now sitting on the sidelines looking for safety.  Because of the moral hazard created by the government bailing out the banks, these banks now look like a safe investment even though the past behavior of the institutions indicates otherwise.  Also, it is increasingly becoming apparent that this bailout money was financed by future inflation.  So in defense of Chuckles and Jake, I guess I would have to say that I would rather deal with trivial things like economic moral hazards and inflation rather than the apocalyptic demise of our financial system.

However, that is if you limit to the bailout to the original one crafted by Bush and Paulson.  The system probably could have contained the inflationary effects of printing $700 billion.  This would have been like a nice dose of Viagra to an otherwise limpid economy.  The Obama administration is behaving like a bunch of teenagers who broke into Grampa Keynes medicine cabinet.

For example: 

Yet one more example of the viability of advanced computer modeling

This chart was used by Obama’s expert team of economist and their magical modeling computers to sell Obama’s stimulus plan.  Of course Obama was all over the news the other day promising that these jobs will come; after all, his experts with their magical computers are telling him so.  Meanwhile tax collection rates are plummeting because large numbers of people aren’t working, and Obama’s innocent little $1.75 trillion forcasted budget deficit will soon balloon to $2 trillion.  When most people’s incomes drop or disappear, they slow their spending.  Then again, most people haven’t reached the point of economic enlightenment that characterize democrats, where laws of economic scarcity can be mitigated with good intentions.

In conclusion, I am glad I was wrong and banks are paying back taxpayer money.  I just wish they were paying it back to someone else other than our prodigal political leaders.

I found a good blog that explores some of these ideas: Carter’s Second Term