Christopher Whalen, managing director of Institutional Risk Analytics, says the claims by Treasury officials that the bailout will cost less than anticipated are pure fluff.
It will actually cost much, much more, he says.
One Treasury estimate put a cost of $87 billion on the financial bailout, well below the $250 billion the Congressional Budget Office estimated last year or other analyses that put the all-in number at $1 trillion or more.
“If you are going to do a ledger, you have to do a full and complete ledger,” Whalen told The New York Times.
“To talk about making money on short-term transactions with the TARP while you have this huge cost to the nation is incongruous.”
Analysts say a major factor missing from Treasury’s math is the huge transfer of wealth from investors to banks that resulted from the Federal Reserve’s near-zero interest-rate policy.
Banks benefit because they earn fat profits on the spread between what they pay for their deposits and what they reap on their loans, especially credit cards, which have a current average rate of 14 percent.
Savers and investors lose, especially those on fixed incomes.
“All interest-sensitive investors have been transferring what they should be receiving to Uncle Sam and the banking industry,” Whalen says. “And you are talking about a lot of money.”
This month some interest rate spreads have reached record levels, notes Floyd Norris in The New York Times.
The difference between what the Treasury pays on a one-year bill — less than half a percentage point — and what it pays on 10-year bonds — a little below 4 percent — expanded to the largest on record this month.
“For banks, that is a license to make money with very little risk, particularly since they can get people to open savings accounts that pay close to nothing,” Norris points out.
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