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False Economy

We will be spending less on TARP than we thought.   It is estimated that TARP will end up costing the taxpayers $200 billion less than was first thought, as financial institutions have recovered faster than anticipated and are paying the money back faster.    TARP turned out to be a sound investment.  Let’s keep it that way by not throwing away the dividends we didn’t really get.

Unfortunately many in our great nation have fallen for a fallacy about money and they are being encouraged in their error by dishonest politicians trying to expand the dependency of people on government largess.  

Trick accounting bankrupts people; don't let government do it

The fallacy involved is thinking that money you saved by not spending it is necessarily money you have in hand.   It is a common fallacy and is a contributing factor to making individuals and families poor.  It is the man who buys a car he cannot afford because he got a good deal.   Instead of understanding that he to borrow $30,000, instead he counts that he has “saved” $10,000 because it “would have cost” more.   His initial error is compounded when - flush with his $10,000 “windfall savings” - he continues to spend money he doesn’t have. 

 This kind of systematic error is part of prospect theory and behavioral economics. Cass Sunstein , President Obama’s regulation advisor, has written an excellent book on these nudges.  There is a lot of thinking going on about this.  One would hope that we will not be so easily fooled this time.

C&J learned this lesson when as a young couple they planned a vacation they couldn’t afford.  We were smart enough to understand it was too much money, but then fell into the phantom money saved trap by going on a cheaper vacation that we still couldn’t afford, secure in the false knowledge that we were being virtuous by saving money.  

A penny saved is not a penny earned if you just blow it

It is even worse with borrowed money and since we are running the biggest deficits in human history, ALL the money we are talking about is borrowed money.    Saving $200 billion just means we have to borrow $200 billion less.  It doesn’t mean we have found $200 billion to spend.

We even have heard some really stupid calls to give the money “back” to the people.   What does this even mean?    The government would borrow the money.   Isn’t this how we got into the financial mess in the first place?  Too many people were borrowing money and giving to themselves w/o remembering or w/o caring that borrowed money is not free money.

Let’s not let get fooled again

Maybe $200 billion doesn’t sound like much when you already have a $1.4 TRILLION deficit, but it is real money and it is not FOUND money.  Politicians may indeed decide to BORROW and spend more, but let’s not be deceived about what they are doing or let them bribe us with our own money.  

A politician who uses phrases like "TARP funds have been freed up" or "we can spend the $200 billion we 'saved'” is lying to us and using an easily identified judgment flaw to try to trick us.  Surely we are smarter than that.   Didn’t the last couple years teach us anything about living on the credit card?


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