GDP Numbers Artificially Inflated by TARP

Barry Ritholtz has the goods.

He notes that the Bureau of Economic Analysis (BEA) notes the effect in their report:

Troubled Asset Relief Program

In October 2008, the Emergency Economic Stabilization Act of 2008 established
the Troubled Asset Relief Program (TARP). Among its provisions, the act authorized the Department of the Treasury to purchase or insure up to $700 billion in assets to alleviate the financial crisis. By the end of the fourth quarter, the program had disbursed $243 billion to banks and other institutions in exchange for shares of preferred stock and warrants. The program also disbursed a $4 billion loan to General Motors in the fourth quarter.

Purchases of financial assets are generally not recorded in the GDP accounts (though they appear in the Federal Reserve’s flow of funds accounts). However, when the Treasury purchases a financial asset (other than a loan) at more favorable terms than are available in private markets, BEA records a portion of the purchase as a capital transfer, calculated as the difference between the actual price paid for the financial asset and an estimate of its market value. This treatment is consistent with the recommendations of the newly updated international guidelines, System of National Accounts 2008. For the fourth quarter, in most cases BEA’s estimates of these capital transfers are based on Congressional Budget Office estimates, which are prepared on a net present value basis. The recording of a capital transfer in the GDP accounts does not affect GDP or net government saving, but does reduce net government lending or borrowing.

(emphasis mine)

You'll notice that that the BEA is saying that the TARP is just a transfer payment, and hence is not counted as GDP, but I would argue that in overpaying for assets and preferred stock, these expenditures find their way into the numbers indirectly.

Ritholtz says that the effect is close to 8% of Q4 GDP, I'd say a bit less, say 2-4%, because the money finds its way into the economy indirectly and slowly, but in either case, it makes the GDP numbers worse than they seem.

If any bankers want to correct me, please do so.