Bailout money from the Government’s TARP (Troubled Asset Relief Program) was not simply a gift to distressed financial institutions. The money came with strings attached including a mandate that recipients pay a preferred dividend and that they (eventually) pay the money back.
While far from out of danger, our financial infrastructure (that is to say banks, insurance companies and Wall Street brokers) has stabilized and institutions that received TARP money are faithfully paying their vig to Uncle Sam. So far the Federal Government has received over $6.7b in dividend payments.
At the time of the bail-out Federal Reserve and Treasury officials told us that these dividends were one of the safeguards they wisely put in place to protect the taxpayer. The clear implication was that, at worst, the dividends would offset losses and, at best taxpayers might actually make a profit on the deal. Theoretically they were correct, but for the dividends to benefit the taxpayer they would need to be deposited back into the Treasury where they would have the effect of lowering the massive debt we incurred when we made the TARP loans in the first place.
The right thing to do, now that the systemic risk appears to be abating, would be to pay back the American people. That would be the right thing to do, but that’s not what’s going to happen.
Instead what is going to happen is that Barney Frank is going to treat the $6.7b plus any additional dividends as so much manna from heaven. Representative Frank the Democrat from Newton, Massachusetts is, of course, Chairman of the powerful Financial Services Committee in the US House of Representatives and is crafting yet another bail-out, this one funded with those found billions in TARP dividends. He’s calling his plan “TARP for Main Street” a title designed to resonate with working class folks who rightly resented the original TARP.
Early drafts of TARP for Main Street (TARPFMS?) are said to include several billion dollars to be used to stave off the foreclosure of homes owned by unemployed people who, understandably, are behind on their mortgages. The mechanics have not been worked out yet but the long-and-the-short-of-it is that the unemployed would get their mortgages paid for them and they would pledge the house as collateral.
For inspiration Mr. Frank harkened back to that happy time of national prosperity and plenty that we all now refer to as the 70s. He is updating a 1975 program called the Emergency Housing Act, and by updating I mean he’s adding zeros to the amounts to be doled out. No one can demonstrate that the Emergency Housing Act did any good the first time it was tried thirty some-odd years ago, but that does not concern the Honorable Representative Frank; social programs of yesteryear are automatically held in high esteem by liberal law makers.
Barney Frank’s proposal is, of course, a bad idea. It is based on the faulty premise that Government loans to the downtrodden are a societal good; they are not. In-fact, loans to the financially weak by the financially strong only serve to weaken the strong without a corresponding strengthening of the weak. Even if the case could be made that they bestowed a long-term benefit to the jobless homeowners who would receive them, the benefit is offset by the harm done to the employed taxpayer from whom the money is taken; Paul indeed gets paid but, unfortunately, Peter gets robbed.
A credible school of economic thought portends that loans to the (financially) undeserving are the genesis of our housing woes and certainly not a method of deliverance from them. Barney proposes we solve a crisis that was caused (in part) by writing sub-prime loans by writing a few billion more in sub-prime loans. The borrowers don’t have jobs, their prospects for finding employment in this economy are dim, the houses they offer as collateral are mostly devoid of equity and we, the tax payers, would be in second position behind the original mortgage lender.
The financial hazards are clear, but let’s not forget the moral hazard we invoke when we allow the unemployed to behave in a manner traditionally reserved for the employed. In-fact, to say that this plan contains a moral hazard aspect is like saying that boating at Niagara Falls contains a water hazard aspect. Homeowners will be lulled into a false sense of security while being buried under more debt, and the markets will be further confused because they won’t know who can actually make their payments and who only appears to be able to make their mortgage payments. While homeowners who struggled to diligently stay current on their loans will increasingly feel like suckers and will become resentful of those receiving the largess.
Subsidizing unemployment, even with the best of intentions, can not encourage employment while taxing the employed won’t do a thing to alleviate unemployment.
And who actually gets the checks? If we pay homeowners directly will they actually pay their mortgages? Maybe they will, but maybe they won’t. Why put good, government funds into a house that’s deep underwater? Many will save the Government money until they have enough for first, last and security deposit on a decent apartment. In-other-words many will take the money and abandon the house anyway. Conversely, if we pay the banks directly on behalf of the homeowner are we really bailing out Main Street or is it just a continuation of the bank rescue plan under a more Orwellian name?
But setting aside the fallacious economics and the absurd underwriting standards, the thing that is truly galling about this proposal is the stunning hubris law makers demonstrate when they so blatantly betray us financially.
The original bail-out can be viewed as success even as we lament the fact that it was necessary. Disaster was averted and those of us, which is to say all of us, who risked the capital that saved the day should get our money back and be justly compensated via the dividends, instead our representatives are going to keep bailing, presumably until the money no longer comes back. They won’t stop until we lose the principle and the dividends.
They do not share our concerns about unimaginable deficits and debilitating debt loads. They don’t empathize with us over our tax burden. They refuse to look at a plan’s viability before they implement it. They spend and spend and spend, and now that a program has surprisingly made some money, they’re going to re-spend it until they’re absolutely sure they’ve turned profit into waste.