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Re: How big a bailout?
From: David Farber <dave () farber net>
Date: Sat, 20 Sep 2008 12:53:36 -0400

Begin forwarded message:

From: "Dave Wilson" <dave () wilson net>
Date: September 20, 2008 10:38:38 AM EDT
To: dave () farber net
Subject: Re: [IP] How big a bailout?

Speaking very solely for myself on this....

You can get a pretty straightforward analysis of expenditures and total costs of the savings and loan bailout from eighties (through 1999) from the Federal Deposit Insurance Corporation here http://tinyurl.com/6zlskk (note that these figures include spending by both the Federal Savings and Loan Insurance Corporation, which ultimately became insolvent at the end of 1986, and the establishment of the Resolution Trust Corporation in 1989).

To summarize: From 1986-95, over 1,000 thrifts failed, forcing the government to take control of about half a trillion in assets, which were then repackaged and resold. As of 1999, losses to U.S. taxpayers totaled $124 billion (the thrift industry paid for another $30 billion, for a total of about $153 billion in total losses for the cleanup). Over the course of the crisis, the number of thrifts declined by about 50 percent, to 1645. The authors of the study do not include financing costs (essentially interest on the money appropriated for RTC expenditures; I think that's not unreasonable, as assets taken by the RTC increased in value over time so I expect it's probably close to a wash).

It's worth noting that the initial estimate of the savings and loan bailout were woefully low, something on the order of 400 thrifts with about $200 billion in assets. Those number were waaaay off: 800 thrifts and $400 billion. In the first year.

I mention this because part of the reason we have reached this crisis point is due to what you can think of as an optimistic bias among traditional economic analysis. The old joke that economists have correctly predicted 15 of the last 7 recessions is actually completely backwards (yes, I understand it's not funny the other way, thanks). My point is that economic analysis almost never nails an upcoming downturn (there's some mechanics to this, obviously; if we all know a recession is coming in six months, we'll stop spending now, and thus the recession will come immediately and not six months from now). But economic analysis is frequently based on the past, more specifically the immediate past. Sometimes that makes sense -- the sun will indeed rise in the East tomorrow -- but it also means you're going to miss the inflection points. Sometimes in a very big way...

Thus, we have spent much of the 21st century listening and watching as very smart guys declare that a decoupling of housing prices from family incomes isn't anything to worry about, that the housing crisis is limited to the sub-prime market, then that it has been "contained" to the mortgage industry in general, then that a general decline in home equity will not affect the economy, and then they wake up and start throwing enormous amounts of money at lenders to rescue them when institutions simply refused to lend to each other, and then they say that a single investment bank implosion does not place other institutions at risk, and finally here we are, acknowledging that all these systems are in fact linked together -- that risk never goes away, no matter how the risk is spread out -- and we've got to do something immediately or spend a decade trying to recover from something that might actually be unprecedented.


On Sat, Sep 20, 2008 at 5:26 AM, David Farber <dave () farber net> wrote:

Begin forwarded message:

From: "David Lesher" <wb8foz () panix com>
Date: September 19, 2008 11:13:11 PM EDT
To: dave () farber net (David Farber)
Subject: How big a bailout?

Prof F:

I'm wondering how deep in the hole we are all going
on these bailouts.

Can we compare it to the Resolution Trust Corp?
How much money was plowed into it;
how much was recovered?

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