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During his Oct. 27, 2010, interview on Comedy Central's The Daily Show with Jon Stewart, President Barack Obama defended the actions taken by the federal government to stabilize the financial crisis -- the source of much voter unhappiness on the campaign trail this year.
Obama said, "If you look at how we have handled this financial crisis -- if you had told me two years ago that we're going to be able to stabilize the system, stabilize the stock market, stabilize the economy, and by the way, at the end of this thing, it will cost less than 1 percent of GDP, where the (1980s savings and loan) crisis cost us 2.5 percent of our entire economy -- a much smaller crisis -- I'd say, 'We'll take that,' because we saved taxpayers a whole lot of money."
That's a striking comparison, so we immediately thought it deserved a fact-check.
After a bit of research, we located the federal report that made that exact comparison. It was an October 2010 document from the Treasury Department titled, "Troubled Asset Relief Program: A Two Year Retrospective." The TARP, as the program is more commonly known, was created under President George W. Bush in the fall of 2008 to head off what policymakers and business leaders feared was a serious threat to the stability of the nation's financial system.
Initially, independent observers projected that TARP would cost $350 billion or more, but the October 2010 report estimates that the total cost for TARP and related programs will be far lower -- about $29 billion.
"We currently expect that the overall direct fiscal cost of all our financial interventions will be less than 1 percent of GDP," the report said. Using the $29 billion figure would easily make the 1 percent cutoff, since GDP for 2009 was just over $14 trillion.
For the purpose of context, the report adds that "this result is notable compared to past systemic financial crises. An International Monetary Fund study found that the average net fiscal cost of resolving roughly 40 banking crises since 1970 was 13 percent of GDP. And according to the Government Accountability Office, the net fiscal cost of cleaning up the U.S. savings and loan crisis was 2.4 percent of GDP."
We located the original IMF study cited in the Treasury report and found that it offers two estimates, using different methodology, of the pricetag for the savings and loan crisis, which occurred when thrifts, under lax regulation, made a series of risky investments that eventually turned bad and left depositors holding the bag. One estimate in the IMF report is 2.4 percent, which is very close to what Obama said. The other is 3.2 percent. Since Obama was satisfied with the lower cost estimate -- which wouldn't be in his interest in making this kind of comparison -- then we'll stipulate to using that estimate.
So, Obama can point to a credible source for his statistical comparison. But we still think it's worth a closer look at the context behind the comparison. Here are two broad issues that we think are important to keep in mind:
• The 1 percent may not include all costs. The Treasury report includes the cost of TARP outlays to support banks, carmakers and the housing sector, as well as TARP and Treasury Department funds used to shore up the troubled insurer AIG.
However, it acknowledges several other types of outlays that are not included in its calculations, and adding in these costs would increase the total burden. "Outside of TARP, we expect to incur substantial losses from Fannie Mae and Freddie Mac (Government Sponsored Enterprises, or GSEs), through capital injections from Treasury to the GSEs through the Preferred Stock Purchase Agreements," the report says.
The report adds that some of these additional losses would be made up by gains elsewhere. One source of expected income stems from authority provided by the Housing and Economic Recovery Act, under which Treasury purchased more than $200 billion in mortgage‐backed securities guaranteed by the GSEs. "Those investments are generating notable returns," the report said. "In addition, as a result of its emergency financial programs, remittances from Federal Reserve operations to the Federal Budget have increased sharply in 2009 and 2010, and they are projected to remain elevated for some time. While considerable uncertainty remains, revenues from these two sources will significantly offset to likely losses elsewhere."
Also not included in the cost is the added deposit insurance payments under the Federal Deposit Insurance Corporation. The widely popular decision to increase the level of assets protected by the FDIC from $100,000 to $250,000 means that taxpayers are now on the hook for greater payouts when banks fail.
And unlike during the S&L crisis, the behind-the-scenes role of the Federal Reserve has been huge in the post-2008 recovery. After the 2008 crisis, the Fed acted in a variety of ways to stabilize various financial markets -- securing loans, for instance, or making implicit guarantees of purchases. This amounted to a "shadow budget," says Maya MacGuineas, president of the Committee for a Responsible Federal Budget -- that is, one that's not officially on the books but which has consequences elsewhere in the economy.
Meanwhile, the report acknowledges additional, intangible costs to the financial crisis that are hard to factor into any calculation.
"Our estimates do not reflect the full economic and fiscal costs of this crisis," the report said, "whether measured in the millions of Americans still searching for work, the lost income for business, or the impact of the recession on federal and state budgets."
Indeed, one obvious exclusion is that the Treasury report doesn't count the cost of the economic stimulus bill, originally estimated at $787 billion. On one level, that may be wise, since it's a cleaner way to compare the current recovery efforts to the S&L debacle, given that the earlier episode was essentially a banking crisis, not an economy-wide crisis. On the other hand, the president's statement -- which included the words "stabilize the economy" -- seems to suggest a broader interpretation that includes the cost of the stimulus.
Put all of this together and you have a lot of different ways to calculate the numbers. "There are so many variables on either side that it's impossible to say whether you can really compare the costs" of the two episodes, said Kathleen Day, a former journalist and author of S&L Hell: The People and the Politics Behinid the $1 Trillion Savings and Loan Scandal.
While we think the statistic Obama used is legitimate, it's more the start of the argument than the end of it. And it omits a number of costs that reasonable people might think should be included.
• The figure Obama cited is a snapshot in time, but the costs are not over yet. To take but one example: The Treasury estimate relies on the assumption that the value of the federal government's investments -- which are effectively keeping down the TARP's cost -- remain stable rather than declining.
"We expect that TARP investments in the banks and the credit market programs will be profitable," the report says. "The recently announced restructuring of AIG will accelerate the government’s exit on terms that are likely to lead to an overall profit on the government’s support for AIG, including the value of Treasury’s interests in AIG held outside of TARP."
That may turn out to be true -- but it also may not. And if it doesn't, taxpayers could be on the hook for higher costs.
In fact, if Obama had made the comparison much earlier in the crisis, the federal government would have been on the hook "for a potentially enormous bill," said Arthur E. Wilmarth Jr., a law professor at George Washington University who specializes in business and finance. "It is fortunate that the ultimate bill will probably turn out to be much lower than the worst-case-scenario." By the same token, he said, troubles in the housing market could increase the cost of recovery efforts within another year or two. "In my opinion, it is far too early to conclude that we have successfully contained and resolved the financial crisis."
So where does this leave us? Obama has repeated a defensible estimate of the cost of the two financial crises. But there are lots of other estimates that would be equally if not more valid, and those wouldn't be as favorable to the White House's case. The figures Obama cited don't include many of the ancillary (and often intangible) costs of the recovery, and there's no way of knowing for sure that current cost estimates won't go up in future years. On balance, we rate his comment Half True.
Barack Obama, interview on Comedy Central's The Daily Show with Jon Stewart, Oct. 27, 2010
U.S. Treasury Department, "Troubled Asset Relief Program: A Two Year Retrospective," October 2010
International Monetary Fund, "The Length and Cost of Banking Crises," March 1999
Bureau of Economic Analysis, historical table for U.S. GDP, accessed Oct. 28, 2010
E-mail interview with Arthur E. Wilmarth Jr., a law professor at George Washington University, Oct. 28, 2020
E-mail interview with Dan Mitchell, senior fellow at the Cato Institute, Oct. 28, 2010
E-mail interview with Kathleen Day, author of S&L Hell: The People and the Politics Behinid the $1 Trillion Savings and Loan Scandal, Oct. 28, 2010
E-mail interview with Maya MacGuineas, president of the Committee for a Responsible Federal Budget, Oct. 28, 2010
Interview with Kris Belisle, communications director for the Special Inspector General for TARP, Oct. 28, 2010
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