Thursday, April 16, 2009

Paying back the TARP, Part II

The other day Goldman Sachs announced that it would be paying back TARP funds and it did an equity offering to raise the money. Because equity offerings tend to be dilutive, the stock dropped 12 percent the very next day.

Investors handed over their cash for shares in GS, leaving them with shares that were worth less than the day they bought them. (And which still are!) Their net worth—otherwise known as their wealth—decreased.

Yet by the twisted logic of Treasury officials, lawmakers and most of the public, this constituted a “paying back” of the taxpayer.

In contrast the TARP funds “cost” nothing to the taxpayer because they were created by pushing a button on the Treasury’s spreadsheet. Yes, it added to the monetary base, but there was no immediate danger of inflation nor is there any real evidence that can be put forth, which would show certain inflation at some point in the future.

The original allocation of TARP funds was a benefit to taxpayers. The paying back was a cost. The current belief system has it all backwards.

More banks, including JP Morgan, plan to “pay back” the taxpayer very soon. With all these paybacks coming, I just hope we all have enough left to buy a sandwhich.

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