krebscycle

Finally, Sorkin again makes the annoying assertion on the AIG bailout that, “we got our money back — with more than $22 billion in profit.”

This one deserves derision. Access to liquidity back in 2008-2009 carried an enormous premium. We gave $192 billion to AIG at a time when other companies were dying for cash. We would have made an enormous profit if we had invested government cash almost anywhere – Dean Baker

It may be an “annoying” assertion, but it is a true assertion. The government lent AIG $192 billion dollars and got back $214 billion dollars in a few years – a profit of over 10%. About a year after the government bailed out AIG, the Bircher right, the Republicans, and the Progressive Left were united in screaming that the Federal Reserve Bank was paying top dollar for worthless “toxic assets”, that losses would be in the tens of billions (at least) and that none of this would help anyways. People like Matt Taibbi, Yves Smith, Duncan Black, and so on  all insisted that Tim Geithner was corrupt, stupid and inept. All those “experts”  were wrong. In fact, they were taken in by Republican propaganda and have been as unwilling to admit it as the Liberal Pundits who cheered for Bush’s Iraq Debacle. The Republicans wanted  to discredit the Obama Administration when Geithner moved from the Federal Reserve Bank to the US Department of Treasury and our naive and foolish liberal economics pundits ate it right up.

When I confronted Baker on Twitter he eventually came up with this gem

@root_e Economists define economic profit as profit minus opportunity cost. Sorry that causes you pain, but it’s not my invention.

— Dean Baker (@DeanBaker13)

November 13, 2014

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Well, Sorkin did not say the government made ”economic profit as defined by Economists“, he said the government made a profit – which it did, in fact, in the real world. For purposes of comparison, when Ronald Reagan bailed out the Savings and Loan banks, a much smaller failure, the public ended up with nearly $200 billion in actual  losses (adjusted for inflation). Essentially, the liberal economists have signed on to a mix of Bircher paranoia about the Fed and Republican efforts to damage the Obama Administration. This is a disgrace.  Not only that, but Baker’s argument about “economic profit” is plain stupid. Opportunity Cost is the value  of a forgone investment. The idea behind opportunity cost is that if you invested $1billion in treasury bonds at $2% and you could have put that same $1billion into Dean Baker’s ETF at 25%, you actually missed out on the profit of the alternative opportunity. A little thought shows “opportunity cost” is far from straightforward – you have to think about risks, about your state of knowledge about the future and so on. But applying the concept of opportunity cost to the Federal Reserve Bank is particularly mistaken, because the Federal Reserve Bank prints money. The FRB didn’t forgo anything at all: if it wanted to invest in Dean’s ETF, it could have printed another $192billion. The concept of opportunity cost does not apply to an institution that prints money. The FRB has unlimited opportunity to make infinite profit by creating money out of thin air. Here: take some air, print $1Billion – voila, $1billion in pure profit on investment of nothing. Every  FRB investment would be money losing by Dean’s standard.  And  FRB did not invest in AIG because it wanted to maximize returns, it invested in AIG because it wanted to stop a financial panic.  Baker is arguing that if instead of stopping the panic the Fed had bought stocks and someone else (maybe the Martian Fed) had stopped the panic then the Fed would have made more money. That makes zero sense. Intoxicated with their contempt for the Black President, contempt that was marketed to naive people by experts, the Liberal Economists carry on with this truculent carping.