A lot of economic indicators go hot and cold these days, but here's one that's been consistently getting better: The government has been steadily withdrawing its extraordinary support for the ravaged economy.
It might not seem that way. Lender GMAC is lined up for another bailout of $3 billion to $6 billion from the Treasury Department. Federal pay czar Ken Feinberg recently elbowed aside the boards of directors at seven big bailout recipients by dictating the pay of their top executives. Congress is devising new regulations to police Wall Street, rein in risky practices, protect consumers from corporate predators, and get the government more involved in the private sector than it has been in 70 years.
But the government has also been quietly ending many of the emergency programs put into place over the past 18 months to prevent a recession from turning into a full-blown financial collapse. At the peak of its intervention, the government had agreed to make about $11 trillion worth of bailouts, loans, loan guarantees, asset purchases, and other kinds of support for businesses and financial markets. That astounding sum was nearly three times as much as the entire government spends each year. But the tab has now declined to a mere $1.5 trillion or so, according to the Deloitte Center for Banking Solutions. And it appears that most of those interventions could end up costing the government little or nothing. "The government could even make money on some of those deals," says Don Ogilvie, independent chairman of the center and former CEO of the American Bankers Association.
The most familiar—and controversial—emergency intervention has been the $700 billion Troubled Assets Relief Program, or TARP, which morphed from a targeted Wall Street rescue into a catchall bailout fund for pariah firms like AIG. At one point late last year, government officials felt that even the $700 billion TARP kitty might not be enough to forestall a financial collapse, and they considered asking Congress for more. But the government never gave out all the TARP money, and banks have since repaid about $72 billion, with interest, according to ProPublica's bailout tracker.
TARP has been a deeply flawed program with outrageous byproducts like the bonuses at AIG and Merrill Lynch, and historians may ultimately judge it to have been a poor use of taxpayer money. But it won't turn out to be the financial black hole that many once feared: The government probably won't get back all $700 billion, but it now seems as if it will get back most of the money.
Other behind-the-scenes programs, arcane to most Americans, have probably done a lot more than TARP to stabilize the economy. And they're winding down much faster than TARP. Here's where a few of them stand:
The money market mutual fund guarantee program took effect in September 2008 to guarantee the principal in money market funds, which amounted to protection for $3.5 trillion worth of assets. Money market funds aren't insured by the FDIC, and a run on such funds began last year after one of them suffered losses and dipped below a share price of $1, an inviolate threshold. The guarantee was meant to stop the run, back the principal in all money market funds, and ensure that companies would continue to be able to use such funds for routine financing. The program ended a year after it went into effect, with no apparent problems, a sign of restored confidence in this basic mechanism of the financial markets.
[See why stocks are surging as jobs disappear.]
The commercial paper funding facility went into operation in October 2008, to back the short-term lending that many companies depend on to fund day-to-day operations, which became endangered as last year's credit crunch intensified. The Federal Reserve said it would back up to $1.8 trillion worth of commercial paper, according to Deloitte, but the actual commitment has dwindled to just $45 billion. That's a sign that companies are meeting their capital needs in the normal markets, and the program is set to expire on Feb. 1, 2010.
The term auction facility is another Fed program that allows institutions struggling to get short-term loans elsewhere to borrow from the central bank at interest rates determined through an auction. The Fed initially committed up to $150 billion in funds to each auction, held every 28 days. That's fallen to $50 billion per auction and will soon decline to $25 billion—another sign that the credit crunch is easing and government saviors are backing off.
Deloitte's analysis doesn't include the $787 billion stimulus program passed earlier this year, and there could be more stimulus spending on the way. And the government is still backing the debt of private-sector banks, buying mortgage-backed securities and other types of consumer loans, and pulling other levers to get the economy back on track. But almost all of those programs are winding down or declining in scope. That doesn't mean the economy is on its feet again; it means the surgeons have done most of their work, and the patient must now heal on its own. "There's still going to be a lot of pain," says Ogilvie, "but it's a better sign that the government is withdrawing from these programs than not withdrawing." That may be as good as the news gets for the foreseeable future.