TBTF meets TNAF
Read it all.
The left leaning Center for Economic and Policy Research released an interesting study last week that looked at the implicit benefits that banks have received from The Bailout and associated Fed programs. The report finds that banks have received up to $34.1 billion in benefits, beyond the TARP infusions, from cheap access to credit due to their too big to fail (TBTF) status. Here is the gist of the study:
A predicted result of a formal TBTF policy is that the gap between the interest rate that smaller banks must pay to obtain deposits and otherwise borrow funds and the interest rate paid by the TBTF banks would increase, since the TBTF banks are now effectively able to borrow all their funds (not just smaller deposits) with the backing of the federal government.
Note that the "subsidy" mentioned here is not direct cash taken from taxpayer coffers, but rather is a benefit that is gained by the promised use of taxpayer monies to insure against losses/failure. This is the government using policy to redirect resources in the marketplace.
[The CEPR report continues,]It is worth noting that the TBTF subsidy is substantial compared to other items in the federal budget that have often provoked controversy. [...] As can be seen, in the high-subsidy scenario, which uses the entire seven-year period as the comparison, the TBTF bank subsidy is more than twice as large as the TANF block grant for 2009. The bank subsidy is almost 20 percent larger than spending on foreign aid....
In an editorial on this subject, The New York Times accurately concludes:
FORCING policy leaders to dismantle too-big-to-fail banks will not be easy. These institutions want to maintain the status quo, and they wield enormous power. Still, taxpayers have a right to know the extent to which those institutions are benefiting from the backstops that are in place. The analysis provided by Mr. Baker and his colleagues is an important step in this direction. Too-big-to-fail is already an extremely costly policy; the longer it is allowed to persist, the heavier this taxpayer burden will become.