Wednesday, January 11, 2012

Bazookas, Bailouts and Fiscal Policy

As a result of the financial crisis, economic policy both in Europe and the US has been driven by announcements of plans that involved large sums of funding provided by governments to support the economy (the "bazooka" approach). It was first in the US with TARP (Troubled asset relief program) and in Europe with the EFSF (European Financial Stability Facility). In both cases we are talking about plans that amount to hundreds of billions of dollars (or euros). These large figures are seen large enough to provide support for any possible future risk, in order to provide credibility.

There is, however, a downside to this approach. Many will only remember the headline figure and will associate the number to the actual cost paid by the government (and ultimately by the tax payer). For some there is a direct association between bailout funds and taxpayer costs. And the feeling that the cost to the tax payer has been so large was partly behind the resistance to addition fiscal policy stimulus and the support that austerity received during the year 2011.

But what are the facts? Regarding TARP, the CBO (congressional budget office) regularly updates on their estimated cost to the US tax payers. Their last figures suggest that out of the original $700 billion, only $428 billion were disbursed. Most of these funds took the form of loans or investments, some of which have been paid back with a profit for the government. The estimated cost for the tax payer today is about $34 billion, a large number but far from the $700 billion that made the headlines. Most of the losses come from AIG and funds given to car manufacturers. A precise picture of the losses is below. Click on it for a larger image or you can also go directly to the source.

The same is true for the EFSF. The EFSF was established with guarantees of €780 billion and a lending capacity of €440 billion. So far it has only lent €13.5 billion and the expectation (so far) is that all this money will be paid back. But the public perception is one of large sums of transfers across Euro countries (interestingly, EU structural funds account for more than €40billion on an annual basis and agricultural funds account to €50 billion -- and these are real transfers, not loans) .

There might be some benefits to the bazooka approach to economic policy announcements in times of crisis. But there is also a need to go back ex-post and assess the actual cost of these policies. Otherwise, the headline figure is the only one that sticks in the public debate and some will equate this figure to the cost to the tax payer in an attempt to scare individuals about large governments and the use of fiscal policy.

Antonio Fatás