The crooks and swindlers that make up the elite in the U.S. like to claim that the Fed made a profit out of TARP. The claim is of course nonsense. But it’s important to be clear as to why.
The institution which issues a nation’s currency – i.e. the institution which has the right to engage in seignorage – can hardly avoid making a profit. That is why – gasps of amazement – it is profitable to turn out one’s own $100 bills, £20 notes, etc.
Even if one only LENDS OUT bundles of $100 bills at interest, rather than turning them out and refusing to ever take them back, there is still profit to be made on the interest. And that is where part of the Fed’s “profit on TARP” comes from.
However, the money lent out could equally well have been lent to households, small businesses, local government, etc etc. Thus the fact a profit was made by lending TARP money to large banks and the well-connected is not a justification for lending to banks and the well connected.
PLUS, the money lent out under TARP was lent at a ludicrously low rate of interest: a huge misallocation of resources.
Indeed, the fact that central bank makes a so called profit from lending is not even an argument for lending, since the money created could just as easily be spent directly into the economy: on education, infrastructure, etc. Alternatively, the new money could be used to reduce taxes.
This raises the question as to what is the best way to allocate “new money”.
The new money CAN BE USED to increase lending. For example, the new money itself can be lent out, as was the case with TARP. Alternatively the new money can be used to ENCOURAGE new lending: by reducing interest rates or implementing QE.
But whence the assumption that economic expansion is best implemented via more borrowing rather than a straight increase in spending? Do the authorities (or the crooks and swindlers) ever have any EVIDENCE that increased borrowing is preferable to a straight increase in current spending? Of course not: most of them are too stupid to realise that the question even needs asking.
Moreover, a straight increase in current spending will AUTOMATICALLY lead to increased borrowing and investment where those concerned think borrowing and investment is warranted. Firms making widgets are far better judges of whether it makes sense for them to borrow and make an investment than the crooks, swindlers and morons that make up the elite.
And it’s not just the PRIVATE SECTOR than can decide for itself when investment is warranted: public sector entities like local government or highway authorities are equally capable of making “borrow and invest” decisions.