December 16, 2010

Geithner: TARP Will Cost Much Less Than Expected

‘Remarkably low when compared to past systemic crises’

Fresh off his kidney stone surgery last week, it was back to work for Treasury Secretary Tim Geithner on Thursday, as he headed to Capitol Hill to outline the benefits of the government's bailout of the financial system.

The secretary presented an overview of the Administration’s response to the financial crisis, noting that its efforts, including the Troubled Asset Relief Program (TARP), prevented a more severe economic recession and “put the nation on the path of recovery.”

In addition, he discussed how the taxpayers are being repaid and that the cost of the TARP program continues to fall.

“In terms of direct financial cost, TARP will rank as one of the most effective crisis response programs ever implemented,” he said.  “Independent observers, such as the Congressional Budget Office (CBO), estimated early on that TARP would cost $350 billion or more.  Now, because of the success of the program, TARP is likely to cost a fraction of that amount.  CBO today estimates the cost of the program to be as low as $25 billion.”

He claimed the cost of TARP is likely to be no greater than the amount spent on the program’s housing initiatives.  The remainder of the investment programs under TARP – in banks, AIG, credit markets, and the auto industry – will likely, in the aggregate, ultimately yield a positive return for taxpayers. 

He further discussed the cost of the government’s broader response efforts in relation to past government intervention, which “is remarkably low when compared to past systemic crises.”

“An IMF study found that the average net fiscal cost of resolving roughly 40 banking crises since 1970 was 13% of GDP,” Geithner said.  “The GAO estimates that the cost of the U.S. Savings and Loan Crisis was 2.4% of GDP.  In contrast, the direct fiscal cost of all our interventions, including the actions of the Federal Reserve, the FDIC, and our efforts to support the GSEs is likely to be less than 1% of GDP. The true cost of this crisis to the economy, however – the jobs, wealth and growth that it erased – is much higher, but that damage would have been far worse without the government’s emergency response.”

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