The hidden costs of TARP

It’s unclear exactly how much the government had to borrow to pay for TARP. But according to Barofsky’s report, the government paid for 46% of its expenditures in 2009 by issuing new debt, compared with the 10-year average of 9%.

Barofsky said that’s okay for now, since the cost of funding through debt is very cheap because of historically low interest rates. But as the government’s debt mounts through bailouts and stimulus, rates could go higher and the government’s interest payments could get much more expensive…

Another hidden cost could come in the form of promoting bad behavior.

After financial institutions threatened the stability of the economy by making irresponsible bets, the government responded by sending them massive infusions of capital. In addition, Treasury gave companies cheap loans to encourage them to buy risky assets like mortgage-backed securities that were a major cause of the credit crisis. The report also notes that “too big to fail” firms only got bigger because of TARP.

All of these issues have set the stage for another large-scale bust unless serious effort is made on reforming regulation of the financial markets, the report said.