Obama - Stop the Bailouts, We Want to Get Off

Now that he's looked closely at the numbers, Barack Obama wants Washington to show some spending discipline. After his gargantuan stimulus package, that is.

He said recently:

We've got trillion-dollar deficits for years to come. We're going to have to bring significant reform ... to the overall budget process.... We'll have to make tough choices, and we're going to have to break old habits. (Transcript.)

Here's one way he could start breaking old habits: Cancel the second half of the $700 billion bailout package passed last year.

Bailout baron Henry Paulson, President Bush's Treasury Secretary, has drawn intensifying criticism for his handling of the misnamed Trouble Assets Relief Program, which has relieved hardly anybody of their troubled assets. TARP's original mission has morphed into another, and another, with money now going to auto companies, insurance giant AIG, and a handful of banks that haven't even been identified.

But in broad terms, TARP did what it was supposed to do: It prevented a panic and started gluing a shattered finanical system back together. There's still a lot of damage that needs to be repaired over coming years, as banks rebuild their balance sheet and governments find better ways to regulate them. But Phase I of the financial bailout is over.

[See why letting Lehman Brothers fail might have been the best move of 2008.]

So why not end TARP altogether - and save Uncle Sam $350 billion? So far, Paulson & Co. have dispensed about half of the $700 billion appropriated for the bailout. To get the rest, the administration - whether Bush or Obama - has to go back to Congress and show why it needs the money.

The case isn't nearly as compelling as it was last September, when the specter of economic Armageddon drove Congress to pass one of the most dramatic spending bills in history. Most of the institutions deemed too big to fail - think Citigroup (C), AIG, General Motors (GM) - have been stabilized with federal money. It's time for them to limp the rest of the way back to health on their own. Meanwhile, real estate developers, retailers, and nearly every interest group in Washington claim that they, too, deserve TARP funds, or else there will be a national catastrophe.

[See 9 reasons why this recession might be good for us.]

Obama should say no. The government's job is to steer a faltering economy back onto the highway, which Obama is planning to do with a gigantic stimulus plan that could total $700 billion or more - in addition to the TARP funds already spent. It's worth reminding all the free-market capitalists who now want a bailout that it is not the government's job to boost the stock markets, save every foundering company, or cover losses due to bad decisions or even misfortune. Come to think of it, the government should remind itself of all that.

[See why more failure in 2009 might be good for the economy.}

That $350 billion in unspent TARP funds would essentially be borrowed money. It's sitting on the table, for Congress and the administration to spend, like a huge, irresistible gift card. But it will need to be paid back in the future. Leaving it on the table would be a good way for Obama to start showing some fiscal restraint, even as he tees up billions in stimulus spending.

There's also the question of directing some of the TARP funds to homeowners facing foreclosure, which is how many members of Congress would like to spend the second $350 billion. But that's a bedeviling challenge that involves evaluating millions of borrowers one at a time, to figure out if they deserve help or not. Nobobdy has solved that puzzle yet.

[See why the feds rescue banks, not homeowners.]

Some in government want to spend the money anyway, as if a flood of federal funds will lift enough boats to make it worthwhile, even if it means billions of misspent taxpayer dollars. Of course, that's how Washington operates. Up till now, anyway.

Disclosure: no positions

Comments

[Crocodilian:]

"So why not end TARP altogether - and save Uncle Sam $350 billion?"

Because its not clear that this would save any money. Take a look at the US Budget . . . consider the revenue side of the ledger. Allowing a myriad of institutions and companies to go bust will crater tax receipts, and end up costing us plenty. On the expenditure side, letting, say Citi go bust would trigger billions of FDIC claims . . . not something that can be met by the member banks. And there's unemployment expense, and more. Letting the economy crash ain't cheap.

"That $350 billion in unspent TARP funds would essentially be borrowed money."

Seems to me that if someone offers you the opportunity to borrow money at %2.5 for 30 years, and repay in a currency that you control, you should take it. The US Taxpayer may never again see a trade as good as Treasuries that are sold at these levels-- its a gift of purchasing power by bond buyers to the United States.

Jan 07 03:41 PM

[prudentinve...:]

You make several good points.

Governments have no money, just the ability to tax productive people and corporations. So bailouts of any sort are not paid for by government, they are paid for by productive individuals and companies. The economy as a whole cannot benefit by penalizing the productive to subsidize mismanaged corporations or profligate consumers.

Jan 07 03:45 PM

[Ray Lopez:]

Rick Newman makes a good case. But talk is cheap. What will work is results--and negative results, aka failure. When Paulson and Bernanke and Obama's Keynesian remedies fail, then and only then will the Roosevelt era supporters finally conceed that Keynesianism is not a panacea. Just like the Japanese have concluded, after over a decade of Keynesian stimulus failure. The old timers had it right--in the 19th century. Let the rot fail, let the barn burn down, kill off the rats, and rebuild. The debt jubilee of the ancient Middle East also comes to mind.

Jan 07 04:29 PM

[Socialism c...:]

The ONLY answer is to drastically downsize government and its spending...replacing consumer spending with government spending will NOT work long-term. We all know that. The way to ramp consumer spending back up is to give us back OUR money so that we can get out of debt and begin spending out of savings instead of on credit. This requires massive, permanent tax cuts...actually, complete overhaul of our taxation -- a move from confiscatory taxation to consumptive taxation, so that there is no initial hurdle and we can choose where to allocate all of our own money. This need not be painful -- with systems like the Fair Tax, only discretionary spending is taxed, and there are "prebates" so that noone is taxed below the poverty line. (fairtax.org)

What the government is doing right now is the opposite -- continuing to tax, even increasing taxation...and ramping up government spending. The debt that is being created to do this is HUGE hurdle for long-term growth. Big government is the SOURCE of this bubble and has been building for decades. Why can't we see that?

Jan 07 05:41 PM

[Steven Hansen:]

the role of the government in a capitalist economy recession is to mitigate the effects on the citizens (eg unemployment).

what we are seeing is a government who seems to want to repair the economy without letting the elements that created the recession to work their way out (unwind) of the system.

i have doubts that a government who did not see (or prevent this event from occurring) could properly effect a repair.

Jan 08 01:22 AM

[rm:]

How about this:

A dollar-for-dollar match for paying off consumer debt (principal), up to $2,500.

Or, a tax credit for every dollar of consumer debt paid off.

I'm not well-versed enough to know what the ramifications of this would be, however I'm sure someone here will point out the flaws.

What's clear to me that the average American is carrying the weight of too much consumer debt, the ability to spend-spend-spend is diminished, and we need to clean up our books on the private side if we're to be healthy long-term as a nation.

Jan 08 09:40 AM

[axelrod608:]

Since the gummint started trying to fix things, they've comitted about $8Trillion to the fight. And the results ? Earnings, propertiy values and employment continue to drop. Credit is still tight. Foreclosures are increasing.

The ONLY plus is that stock prices have come back 20% because the investmet banks are using TARP funds to buy beaten-down stocks.

We're in a hole and the gummint is still digging and ordering bigger shovels.

Jan 08 05:36 PM

[Crocodilian:]

On Jan 08 05:36 PM axelrod608 wrote:

> Since the gummint started trying to fix things, they've comitted
> about $8Trillion to the fight. And the results ? Earnings, propertiy
> values and employment continue to drop. Credit is still tight.
> Foreclosures are increasing.

Today, you have a banking system that is still working. Given were we were in August-October, that was something that was very much in question. The bailout hasn't fixed everything that's wrong with this very sick system, but its kept it from coming apart.

Outside of a few IndyMac accounts, I'm not aware that anyone has lost any money in a banking failure. You're not considering where we were in late summer/early fall. The price of "letting the chips fall where they may" was extremely high.

Here's a for instance: WaMu. WaMu was undergoing a "slow run" at the time the Government created the deal for it. WaMu was not a small bank . . . Had the Feds just stepped aside WaMu going bust could easily have propagated into a run on other institutions. We know that Lehman and Bear Stearns busted. AIG, Merrill, Morgan Stanley, and potentially even Goldman could have done so too. There was also tremendous worry about GE, which was apparently experiencing difficulty rolling its enormous commercial paper positions.

One argument is: "that's what should have been allowed to happen".

And that argument might be right; but you can't argue that that course would have been without cost. The estimate of the cost of allowing Lehman to collapse as it did are not cheap, as a Reuters story noted

"We're still licking the wounds of Lehman," said Jochen Sanio, president of the German Federal Financial Supervisory Authority, at an international banking conference. "It caused international damage of $300 billion outside the U.S."

Estimates of losses from Lehman's failure in the US run in the $100 billion range as well.

The bailout isn't cheap, but neither is the failure of a major financial institution.

Jan 09 03:16 AM