More on the costs of the Wall Street bailout

The Economist recently published another article about the declining estimates of the costs of the Troubled Asset Relief Program (TARP). The article, here, notes that TARP may end up making the taxpayers money. The article quotes (my former colleague at Treasury) Lewis Alexander saying

If you follow Bagehot’s rule—ie, ‘lend freely against good collateral at a penalty rate’—you will make money.

While we may or may not make money (see GM, Chrysler, AIG, and Citi), it seems likely that the costs of TARP and the Fed actions will be very small. So, great work Ben, Lew, Paulson, Geithner, and many, many others.

But what the article emphasizes is that there are lots of costs outside of TARP. The most important of these is the cost of the bailout of the Fannie Mae and Freddie Mac, the enormous mortgage insurers that may end up costing taxpayers something in the hundreds of billions (although again, maybe a lot less).

More unconvincingly, the article argues that the crisis lost us significant tax revenues. But confused in the article is the difference between the cost of the bailouts (in the title) and the costs of the crisis (). Had the bailouts not been done, how much tax revenues would have been lost? Maybe TARP, the bailouts of Fannie and Freddie, Maiden Lane I-III, etc. actually raised tax revenues?  If the bailouts helped markets and raised output, then they surely raised revenues. Maybe even enough to cover the costs of the bailout? An interesting question. (Even the arguments that I can think of about whey the bailouts were bad suggest that they have raised revenues today, although they also suggest that we may lose some in the future unless we get financial sector reform).