To add to a recent post I made putting GM’s ad touting the payback of its government loan into perspective, here is Reason.tv’s take on the subject:
My post from yesterday on TARP and Keynesian economic theory has also been posted on Scriptus. That is the blog for the Political Science Graduate Student Organization (PSGSO) at the University of South Florida, of which I am the vice president.
Also, the Web site for PSGSO can be viewed here. Thanks to Joanna for posting it.
Will the federal government ever run out of TARP money? The latest proposal is to use $1.5 billion from that seemingly never-ending slush fund to prop up the mortgages of homeowners who either are unemployed or owe more on their house than it is worth. The money will be targeted to the five states which have seen the most dramatic (percentage-wise) decrease in home values: Arizona, California, Florida, Michigan and Nevada.
Earlier this month, President Obama proposed using $30 billion in funds paid back to TARP by banks to encourage “community” banks to lend to “small” businesses. A key point to remember is that all of these endless funds politicians seem to always find to spend represent money that the federal government doesn’t in fact have (given the massive federal debt). Basic economics, however, tells us that it has to come from somewhere. It will eventually be paid for through more inflationary money printing, increased debt or higher taxes — none of which are good for an economy in need of recovery.
The Keynesians will tell you that this amount of spending is necessary to “stimulate” the economy. They argue that when private-sector spending is down during an economic recession, the government has to step in and spend money to revitalize the economy. One basic problem with that logic: The money government spends has to come from the private sector through one way or another — either through borrowing, taxing or devaluing the currency through money printing.
All of this means less money available for those in the private sector to spend and more for government to redirect in the way it deems fit. That’s most likely why John Maynard Keynes’ economic theories appeal to those who have a predisposition to increase the power and scope of government (read: statists).
The last few years of “recovery” and “stimulus” plans from government have served as a good example of Keynesian economics in action. Unfortunately, such flawed economic theorizing has real-world negative consequences for both Keynesians and non-Keynesians alike.
A seldom publicized fact about the TARP legislation is that funds returned/recovered by the program are supposed to go toward reducing the federal debt. That seemingly (read: thankfully) would prevent one of President Obama’s State of the Union proposals to give $30 billion already paid back to the program to “community” banks to lend to “small” businesses (both adjectives in quotes to, of course, be defined by the government).
PolitiFact reported on this issue when fact-checking a statement by Sen. Judd Gregg (R-NH). Notably, it mentions how Congress could get around the law’s requirement in the following passage:
But we also talked with budget experts who said that Congress could get around those rules in a number of ways. For example, Congress could rescind the TARP money and then, in a separate action, use it to pay other expenses, said Brian Riedl, lead budget analyst for the conservative Heritage Foundation.
Spending more money on such ideas is only aided by the fact that the House of Representatives recently raised the official federal debt ceiling. Only the sky is the limit these days.
The special inspector general for the Troubled Asset Relief Program (TARP) has just recently released a quarterly report on the bank bailout program’s progress (or lack thereof). The report’s conclusions are similar to those from a previous report.
Among the findings were the following:
- “To the extent that huge, interconnected, ‘too big to fail’ institutions contributed to the crisis, those institutions are now even larger, in part because of the substantial subsidies provided by TARP and other bailout programs.”
- “To the extent that institutions were previously incentivized to take reckless risks through through a ‘heads, I win; tails, the Government will bail me out’ mentality, the market is more convinced than ever that the Government will step in as necessary to save systemically significant institutions. This perception was reinforced when TARP was extended until October 3, 2010, thus permitting Treasury to maintain a war chest of potential rescue funding at the same time that banks that have shown questionable ability to return to profitability (and in some cases are posting multi-billion-dollar losses) are exiting TARP programs.”
- “To the extent that large institutions’ risky behavior resulted from the desire to justify ever-greater bonuses — and indeed, the race appears to be on for TARP recipients to exit the program in order to avoid its pay restrictions — the current bonus season demonstrates that although there have been some improvements in the form that bonus compensation takes for some executives, there has been little fundamental change in the excessive compensation culture on Wall Street.”
- “To the extent that the crisis was fueled by a ‘bubble’ in the housing market, the Federal Government’s concerted efforts to support home prices — as discussed more fully in Section 3 of this report — risk re-inflating that bubble in light of the Government’s effective takeover of the housing market through purchases and guarantees, either direct or implicit, of nearly all of the residential mortgage market.”
In short, the government should have never gotten itself involved in “rescuing” the economy from what many in charge were predicting would have been “worse than the Great Depression.” Government’s “solutions” to our problems (read: meddling) tend to only create new problems.
Former President George W. Bush made headlines this past week by announcing the start of the George W. Bush Institute. Among the key points in his speech was that he believes he went against his basic free-market beliefs in setting up the TARP program toward the end of his presidency.
He said the following:
I believe in the power of free enterprise, which made the decision I faced last fall one of the most difficult of my presidency. I went against my free market instincts and approved a temporary government intervention to unfreeze the credit markets to that we could avoid a major global depression.
He then argued that steps taken by the federal government since then have gone too far:
As the world recovers, we’re going to face the temptation to replace the risk and reward model of the private sector with the blunt instruments of government spending and control. History shows that the greater threat to prosperity is not too little government involvement but too much.
Here is a clip of that part of the speech:
His speech implies that, except for the $700 billion bailout program, his presidency stayed true to his free-market, anti-government beliefs. The real history is not so kind. Besides TARP, just some of the other deviations from those principles included the Medicare prescription-drug bill and “No Child Left Behind.” Both measures increased the federal government’s role in two important aspects of people’s lives: health care and education. Overall spending, a large part due to the two wars in Afghanistan and Iraq, went up during the eight Bush years.
Perhaps it was practical necessity that drove his administration to pursue such policies that went against what Bush claims are his instincts. Or maybe it was political maneuvering. Regardless of why he chose to deviate, the fact is that he did deviate well beyond just the TARP program.
If this is a true change of heart, great; better late than never. Too bad he didn’t make the change before he left office. Implementing these pro-government-intervention policies, particularly the Medicare expansion and TARP, only gave the Obama administration more cover in expanding the bailouts and wanting to expand the government’s role in health care.
A year ago is when the whole flawed — and unconstitutional — government bailout frenzy began under the Bush administration with the Troubled Asset Relief Program (TARP). This pie chart shows where the money has gone so far:
After TARP came the auto bailouts, the “stimulus” package, Cash for Clunkers and many more dubious and economically flawed government programs to help “rescue” our economy — all under Obama. But this graph tells a lot about whether these programs helped save the economy:
The actual unemployment rate has risen well beyond the White House projections for both with and without the recovery plan. Thanks for all your help Washington!
You would think reason would tell politicians to leave things alone from now on. But to ask a politician to listen to reason is typically a complete waste of time — almost as much a waste of time as these bailouts were.