James Pethokoukis

Politics and policy from inside Washington

GMAC, CIT provide more reasons to roll up TARP

Nov 2, 2009 18:29 UTC

Treasury Secretary Timothy Geithner has the option of extending his authority to spend TARP money until October 2010. Congress should forcefully discourage him from doing so, even if it means stripping that authority.

The bankruptcy of CIT despite a $2.3 billion TARP infusion provides one reason. But the story of GMAC is even more compelling. Treasury has already sunk $12.5 billion into it, with perhaps another $5.6 billion on the way. Then there’s GMAC’s FDIC-guaranteed debt.

And given the amount of taxpayer dough on the line, government has become a less-than-silent partner. The FDIC, according to the Wall Street Journal, has ordered GMAC to abandon key components of its new business strategy — offering high rates to depositors and making more auto loans to borrowers with lower credit ratings — because it considers them too risky.

Conflicts and bad incentives abound. Sheila Bair of the FDIC is inclined to caution, given the taxpayer risk. Yet she also needs the company prosperous enough to make good its obligations.

GMAC might indeed be incentivized to take more risk than is prudent, counting on a continuation of the government backstop. But perhaps those risks are actually what GMAC should be doing to revitalize its business. When market discipline and the profit motive are entangled by government subsidy, clarity can prove elusive.

The GMAC bailout is part of the wider bailout of GM and Chrysler. The Bush administration started it in fall 2008 to keep the swing states of Michigan and Ohio in play. Then Team Obama signed on, not wanting to risk the potential jump in unemployment, especially among union autoworkers. But few in Obamaland thought GM and Chrysler to be “systemically” important.

The end result is a sort of crony capitalism where TARP money — originally meant for buying toxic bank assets — is propping up a politically sensitive sector of the economy while subjecting it to political control.

“Slush fund” may be too inflammatory, but recall that the administration is also proposing helping small business by funneling TARP money to community banks that increase lending to the sector. Small business, by the way, has been opposing both the president’s healthcare and cap-and-trade energy plans.

TARP was conceived in a time of crisis. The White House says the crisis has ended. Let TARP end with it.

Larry Summers: Tax increases won’t hurt economy

Nov 2, 2009 14:51 UTC

Here is Obama economic guru Larry Summers at the Economic Club of New York: “I don’t find there to be much evidence that suggests that raising top marginal tax rates from 35 to 39 percent that will be implicit in the repeal of the Bush tax rates will do substantial damage to incentives in the economy.”

1) Remember that the 1993 Clinton tax increases — the Bush tax cut  expiration would restore some of those rates – -happened when the economy had been growing briskly since the 2Q 1991. A very different situation today.

2)  Here is WH CEA Chair Christina Romer’s take on higher taxes when she was a econ prof at Berkeley: “Tax increases appear to have a very large, sustained, and highly significant negative impact on output … [and] that tax cuts have very large and persistent positive output effects.”

3) This tax increase would be in addition to possible healthcare and energy taxes.

COMMENT

Consider the source, period! Why should We be required to pay higher taxes to make up for the incompetence, greed and arrogance of both sides of the political aisle?

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