We’re well into election season and so we’re going to get plenty of assessments of the Obama first term. Paul Glastris at The Washington Monthly has a rosy entry of the genre, describing the “incomplete greatness” of Barack Obama, complete with a list of his 50 greatest accomplishments. You can go ahead and assess them for yourself (I have to quibble with some; how can you list the Lilly Ledbetter Fair Pay Act as an accomplishment when it did absolutely nothing to change the pay equity gap?). But I’m going to focus on this zombie meme that TARP somehow worked to fix the financial system at no cost to the taxpayer.

Rather than have the taxpayers assume the risky and expensive burden of taking over the banks—an expense that Congress, having already approved TARP and the stimulus, was in no mood to authorize—Geithner’s plan was to convince investors to come in and recapitalize them. His plan had three main parts. First, the Treasury, working with the Fed and other agencies, ran “stress tests” of the banks to determine the fragility of their books and how much more capital they’d need to be able to survive and lend in an even more dire economic scenario than was expected at the time. Second, it gave banks six months to raise that amount of capital from private investors, and said that, if they failed, Treasury would use taxpayer dollars to buy ownership shares of the banks at a preset price, effectively establishing a floor for private investors. Third, it created a fund, with both public and private dollars, to buy the toxic assets on the banks’ books, thereby giving some assurance that there would be a market for those assets.

The politics of the plan were dreadful. It looked like more mollycoddling of Wall Street. But, as Joshua Green noted in the Atlantic, it had the desired effect. Private money, $140 billion of it, flooded into the nineteen biggest banks; the lending markets unfroze; and, with the help of low interest rates from the Fed, the banks paid back the TARP funds, with interest. In 2008, the International Monetary Fund studied past financial crises in forty-two countries and found that their governments spent, on average, 13.3 percent of GDP to resolve them. By that measure, it would have cost the U.S. government $1.9 trillion. The Obama plan got the banks back on their feet at essentially zero cost to the government, and in historically near-record time. Let that sink in.

This is getting tiresome. But the idea that the banks were nursed back to health “at essentially zero cost to the government” is pernicious because it will encourage future bailouts. It’s also totally wrong.

The Government Accountability Office released a report just yesterday (hat tip) showing that half of all bailed out banks repaid TARP with money they received from other federal programs.

As of January 31, 2012, 341 institutions had exited CPP, almost half by repaying CPP with funds from other federal programs. Institutions continue to exit CPP, but the number of institutions missing scheduled dividend or interest payments has increased.

That’s not in any way costless. When the Fed lends to banks at near-zero interest rates, and they turn around and lend that money back to the government at 3%, and then use that profit to “pay back” their obligations under TARP, you can call that circular arrangement free, but you might as well run a three-card monte game on the street given that sleight of hand. The trillions lent to the banks at near-zero rates rather than a penalty rate represents an opportunity cost to the government; in fact, it represents quite a large one.

Furthermore, because the financial system was in no real sense reformed through the program, the prospects of another meltdown in the future are enhanced, if not guaranteed. That will cost the government more money even if you only look at the cost in terms of the automatic stabilizers it had to pay (and is still paying) as a result of the Great Recession caused by the financial crisis. Furthermore, failing to stop foreclosures using TARP, a central goal of the program, let at least 2 million unnecessary foreclosures go through in the past several years (I’m using a round, back-of-the-envelope number that’s actually generous to the Administration; they said 3-4 million would be helped by HAMP, and under 1 million have been). Applying the general theory that every foreclosure costs $250,000 to the larger economy, that’s $500 billion right there.

As Matt Stoller writes:

Much of the government-supplied TARP funding (to small banks) was replaced by the Small Business Lending Fund passed in 2010, which Republicans called “TARP 2.0″. The larger banks, however, where much of the bank-based credit creation in the economy takes place, didn’t use this program. Instead, they got an implicit subsidy of between $6B and $300B a year from the widespread belief that the government will not let their bondholders lose money [...]

Our banking system is still reliant on the government for support. Officials can claim that TARP made money, but it’s becoming increasingly clear that this is a way of avoiding a description of the actual policy framework.

People who aren’t aware of these factors should not go around writing articles about how TARP “worked.”