Illustration by Peter Schrank

COULD the worst financial crisis in history really also be one of the cheapest? America's Troubled Asset Relief Programme (TARP), created at the height of the crisis in 2008, will end up costing taxpayers less than 1% of GDP, Treasury officials now believe. By comparison, previous systemic banking crises have on average cost 13% of GDP to resolve, according to estimates by the International Monetary Fund. “This is a pretty good return on investment,” Ben Bernanke, chairman of the Federal Reserve, told Time.

It is not just the Americans who are bullish on bail-outs. Officials around the world believe this crisis will be cheaper than past calamities. In its pre-budget report in December, the British government reckoned its rescue scheme would end up costing just £8 billion ($13 billion), barely 0.5% of GDP—an astonishing feat since its potential exposure to Lloyds Banking Group and Royal Bank of Scotland alone approaches 20% of GDP.

TARP authorised the federal government to deploy up to $700 billion to save the financial system. The final bill was always assumed to be lower, though how much lower has become ever more striking. In August Barack Obama's budget office pencilled in a cost of $341 billion. In the administration's next budget, due in a few weeks, that will be revised down to $117 billion (see chart 1). The administration thinks the final number will end up being closer to $90 billion.

Almost all of that will be explained by lossmaking investments in carmakers—General Motors, Chrysler and their financing arms—and AIG, and by subsidies to homeowners to help modify their mortgages. The administration may have designed a special levy on banks to recoup the costs of TARP (see article) but it actually stands to make money on its investment in them, from dividends, warrants and fees for never-used guarantees.

This picture is incomplete, however. Much of the support to the financial sector went not through TARP but through other agencies. The Federal Reserve has so far profited handsomely on its emergency loans to banks: it will remit a record profit to the Treasury for 2009. The Federal Deposit Insurance Corporation made money on its bank-bond guarantees. Its deposit fund has been exhausted by the toll of failed lenders, but it expects to recover those costs from future fees on banks.

The picture surrounding Fannie Mae and Freddie Mac, two government-sponsored enterprises (GSEs) that own or insure half of American residential mortgages, is grimmer. The Treasury has already injected $111 billion into them to maintain their solvency. Officials say they will need more but nothing like the $400 billion originally authorised (that limit was eliminated late last year, but only out of an abundance of caution, they say). Edward Pinto, an independent consultant, is more pessimistic: he estimates support for the GSEs and the Federal Housing Administration, which guarantees a growing share of new mortgages, will ultimately amount to $330 billion-440 billion.

The government's accounting, typically for bail-outs, also takes a narrow view of the fiscal cost of a crisis. First, it excludes the far larger impact of the recession on government revenue, as well as the costs of fiscal stimulus. Second, no account is taken of non-cash subsidies, like the value of government guarantees that would have cost far more in the private market (assuming they could have been purchased at all).

The final cost also depends on when the totting-up is done. Usually, the longer a government has to dispose of assets acquired during a crisis, the better the recovery rate. Even so, experience varies widely. Five years after its 1991 crisis Sweden had recovered almost all its costs, whereas Finland had recouped very little (see chart 2).

America could yet escape with a modest bill. It did not experience a simultaneous currency crisis, a big contributor to the costliest episodes of the past. Officials argue that because America relies more on securities markets and less on banks than other countries, its crisis was rooted more in illiquidity than in insolvency. The prices of banks' shares plunged and their access to financing dried up, they say, because their assets were shrouded in uncertainty, not because they were obviously insolvent. “If you follow Bagehot's rule—ie, ‘lend freely against good collateral at a penalty rate'—you will make money,” says Lewis Alexander, a Treasury official.

Furthermore, policymakers in America and elsewhere do seem to have learned from history. They generally followed what the IMF and others have identified as “best practice”: rapid application of loan guarantees to end panic, targeted bank recapitalisation to restore solvency, and transparency about banks' health, which restores investor confidence and enables banks to raise private capital.

For all that, they may still be being too optimistic. Carmen Reinhart of the University of Maryland, who has studied financial crises intensively, says policymakers chronically underestimate the extent of bad loans in the financial system and therefore the scale of bail-out costs. The amount of aid the financial system ultimately needs depends on the long-term performance of the economy, which in turn rests partly on how successfully the system is cleansed of bad debts.

America chose not to buy bad loans off its banks. Instead, banks are earning their way out of the mess, helped in part by the Fed's ultra-low interest rates. Although policymakers deserve credit for the speed and scale of their response to the crisis, it is too soon to conclude that they have broken with the past. In 1996 the cost of Japan's bail-out was pegged at 3% of GDP; it now stands at 14%. And as Ms Reinhart observes: “We don't know yet whether we're Japan or not.”

That so huge a crisis might be resolved at such a low price suggests three things: policymakers have been smarter than their predecessors; their numbers are incomplete; or they are too optimistic. Chances are it will be a bit of all three.