James Pethokoukis

Politics and policy from inside Washington

Mitt Romney’s TARP problem

Mar 4, 2010 20:49 UTC

The 2008 financial crisis killed John McCain’s chances of becoming president. But will it kill Mitt Romney’s, too?

The former Massachusetts governor and private equity investor supported the $700 billion bank bailout then and he still supports it today, albeit with a host of reservations and qualifications. The problem, of course, is that the Troubled Asset Relief Program is wildly unpopular among Republicans. And Romney, one can safely assume, would like to be their presidential nominee in 2012.

Yet one can hardly think of a more toxic issue for a GOP candidate in the Age of the Tea Party than support for TARP. Especially a candidate with a Wall Street background. Especially a candidate who many party activists suspect has the heart and soul of a raging moderate. To many conservatives, TARP is nothing more than extreme crony capitalism, Big Government rescuing Big Money. Here is how Michelle Malkin puts it: “Members of Congress who let themselves be bullied into [voting for the bailout] should be experiencing the biggest case of buyer’s remorse in U.S. history.”

Maybe Romney is having that experience. But there are few signs of it. This is what he told FOX News this week: “I hate the way TARP was administered, but I can tell you that we were on a precipice unlike anything we have known before in modern history with the potential of a complete collapse of our currency system and our financial system. Had we not taken action, you could have seen a real devastation.”

Yet Romney clearly knows his TARP support is a problem. He spends time in his new book, “No Apology: The Case for American Greatness,” explaining his position and making his case. Let’s take his key points one by one.

1) “Secretary [Hank] Paulson’s TARP prevented a systemic collapse of the national financial system.”

That is certainly the economic consensus, even among right-of-center economists and financial experts. This bit of analysis from Nicole Gelinas of the free-market Manhattan Institute is typical: “We were never going to escape this debacle without pumping massive amounts of taxpayer money into the financial system.”

There are objectors, of course. Stanford University economist John Taylor, for instance, argues that the TARP proposal itself incited a panic on Wall Street. But even many of these folks were in favor of government debt guarantees for banks and money market funds, as well as Federal Reserve liquidity measures. Having government do nothing was not a realistic option. And while many free-market economists have devised TARP alternatives since the fall of 2008, such proposals were hard to find at the moment of crisis or difficult to quickly implement.

2) “It was intended to prevent a run on virtually every bank and financial institution in the country.”

Or, in other words, TARP was about recapitalizing banks. But Americans thought it was more about unfreezing credit markets and keeping Wall Street lending to Main Street. So when Paulson called off the plan to buy troubled assets — the ones supposedly clogging up the system — and just injected capital, it looked like a bait-and-switch plan. Yet if the banks weren’t stabilized, lending would surely have come to a halt.

3) “But TARP as administered by Secretary Timothy Geithner was as poorly explained, poorly understood, poorly structured and poorly implemented as any legislation in recent history.”

This is confusing. Although it was under Geithner that TARP money was used for foreclosure mitigation, it was under Paulson that TARP shifted from an asset buying program to a capital injection program. And it was also under Paulson that TARP was used to bailout automakers and AIG. Has TARP become a slush fund? Sure, but both Republican Paulson and Democrat Geithner are to blame for that.

Bottom line: Doing nothing back in the fall of 2008 might have worked. It certainly would have negated years of moral hazard created by Washington’s Too Big To Fail approach toward the financial sector. But it would have been an amazingly high-risk proposition. That, especially with the banks now quickly repaying those billions in government bailouts. Even some early TARP critics have calmed down. The University of Chicago’s Luigi Zingales now admits TARP funds were “deployed with conditions not too far removed from market ones.”

Still, many conservatives will probably never see it that way. For them, TARP is a permanent, shining scarlet T on Romney. (They also don’t much like his health reforms in Massachusetts, nor his belief in man-made climate change.) But maybe as time passes and TARP doesn’t look quite as much like a money pit, maybe that letter won’t shine so brightly.


Mitt Romney is just a GWB with a nicer hairdo. If this is all the Rs have for 2012, then we’re in trouble. He’s not gonna let his boys on the Street fail.

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The Volcker Rule, again

Mar 4, 2010 15:39 UTC

President Obama is continuing to push the Volcker Rule to ban prop trading by banks. My sources give me no indication this has a realistic chance of happening. Certainly none of the key members — Dodd, Shelby, Corker, Warner — have warmed to it. So why is Obama pushing it, then? Hey, it is about the only part of his agenda with any popular support. Certainly not healthcare or cap-and-trade or the stimulus. Anti-Wall Street populism works, so more anti-Wall Street populism we will get. This is also why the GOP wants to pass a financial reform bill. It deprives Dems of a political weapon that plays on the stereotype of Republicans as the Party of the Rich.


Obama is just doing his job as rodeo clown, trying to convince people that Wall Street is really too big and too complicated to be brought into compliance with little things like ethics, financial accountability and the law.

You ain’t seen full-on anti-Wall Street populism yet, but at the rate things are going, you will.

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More signs of a 2010 Republican surge

Mar 3, 2010 18:04 UTC

Forget the polls. Look at what the lobbyists are doing. Not only are campaign contributions to Republicans on the rise, advocacy firms are looking to hire more GOPers. So says CQ:

With dozens of House Democrats looking vulnerable in November, lobbyists are prepping for narrower Democratic majorities on Capitol Hill next year — or a possible Republican takeover. “Democratic control initially caused a pendulum swing to Democratic-leaning firms,” said Drew Maloney, a Republican, who is managing director of Ogilvy Government Relations. “You’ll see a swing back towards the middle, where firms that have a bipartisan balance of strong players will be well-positioned in the new environment.”

Lobbying shops began adding Democrats to their rosters when the party won the House in 2006. The hiring trend crested two years later, when Barack Obama won the White House and Democrats took a filibuster-proof majority in the Senate. Since then, tales of hefty six-figure paydays for even junior Democratic aides have wafted throughout the Capitol, enticing many staffers to depart for once-in-a-lifetime salary offers. But with downtown firms now teeming with Democrats — and GOP party leaders betting big on Election Day 2010 — Maloney and other executives are putting Republican resumes on the top of the stack for the first time in four years. Ogilvy recently hired Republicans Justin Daly and John O’Neill to round out the firm’s practice.

Even the Podesta Group and other Democratic-leaning shops are succumbing to the GOP feeding frenzy. Podesta CEO Kimberley Fritts, a Republican, said she has recently hired three Republicans — Steve Northrup, Molly McKew and Robert Taylor — and is looking to perhaps add more.

Balancing the budget

Mar 3, 2010 15:20 UTC

Blue Dog Democrats have introduced an amendment to balance the federal budget by 2020. How that might happen, they don’t say. To get an idea just how tough that would be, look at Republican U.S.Representative Paul Ryan’s Roadmap for America’s Future. It gets the budget in balance without raising taxes by huge entitlement spending cuts. In 2020, his plan would produce deficits of close to 4 percent of GDP — and rising. His first balanced budget doesn’t arrive until 2063.

The 20 Percent Solution

Mar 3, 2010 15:11 UTC

House Republicans Jeb Hensarling and Mike Pence want a constitutional amendment to limit government spending to 20 percent of GDP, its rough historical average. In their Wall Street Journal op-ed, H&P admit, significantly, that America cannot grow its way out of its debt problem:

Can we tax our way out of this problem? No. In order to pay for what we are on track to spend under current law, taxes would have to double. This would crush our economy and condemn future generations to a far lower standard of living. That is not an option. Can we grow our way out? Unfortunately, no. Although pro-growth policies like simplifying the tax code and lowering rates are critical components of any solution, they alone are insufficient. Mr. Walker estimated it would take double-digit economic growth every year for the next 75 years in order to close the fiscal gap.

Me: They don’t say how the government should hit that 20 percent goal, given the expected rise in entitlement spending. But it does provide a marker. They aren’t arguing for small government as much as typical government, at least overall. But hitting that 20 percent would require a radical transformation of US domestic economic policies. Both Social Security and Medicare would be transformed, particularly the latter. Nothing typical about that.


At least it is now possible for politicians to talk about cutting entitlement programs and not get whacked at the polls for it. Pres. Bush did one good thing; he tried to sell changes to Soc. Sec. to the American people. He failed to sell but he didn’t get clobbered at the polls so that is progress.

We’ll see if Republicans can sustain the effort. The leadership distanced itself from Rep. Ryan’s “roadmap” but its still there.

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Wall Street’s lobbyists deserve their bonuses

Mar 2, 2010 22:30 UTC

America’s big banks aren’t being broken up. Nor does it appear there will be strict new limits on their activities. And while lenders may have to cope with a new consumer regulator, its power and scope is evanescing daily. If there is any group from Wall Street deserving of fat bonuses this year, it’s the industry’s lobbyists in Washington.

The banks smartly recognized regulatory reform was inevitable after the greatest financial meltdown since the Great Depression. So rather than try to stop it, the industry helped mold and massage any changes into a shape it could tolerate. And early indications from Congress suggest they’ve been successful.

Wall Street’s crew on K Street, lobbyists’ answer to advertising’s Madison Avenue, has been formidable. It includes the American Bankers Association, the Financial Services Roundtable, the Financial Services Forum and the U.S. Chamber of Commerce. They set their sights early on a White House proposal to create a powerful and independent Consumer Financial Protection Agency.

The lobbyists have successfully scaled back various iterations of the plan. One would make the regulator part of the Treasury Department, and force it to consult with existing watchdogs before imposing restrictions. Republican alternatives are even weaker, alternately housing a consumer unit either in the Federal Deposit Insurance Corp or the Federal Reserve. Expect a diluted compromise between diluted compromises — just as seems the case for the “Volcker Rule” to limit proprietary trading by banks.

Other lobbying successes abound. The Independent Community Bankers of America, which advocates for smaller lenders, helped force mega-banks to pre-fund any future possible bailouts. The Securities Industry and Financial Markets Association, along with the insurance industry, derailed strict Senate regulation of retail investment brokers.

Though the bankers’ advocates in Washington have done well, their work has been caught out in one regard. The International Monetary Fund recently found that banks that invested more to influence policy over the past decade were more likely to take more securitization risks, have larger loan defaults and sharper stock falls during key points of the crisis. The lobbyists may find much of their upcoming lobbying is focused on next year’s bonus.

Romney’s “No Apology”

Mar 2, 2010 21:25 UTC

Just started reading Mitt Romney’s book “No Apology.” Actually quite a lot of meat in the economics chapters. The former Massachusetts governor and possible Republican presidential contender wants to cut investment and corporate taxes. Doesn’t like the Fair Tax or value-added taxes. Seems willing to consider a carbon tax/payroll tax swap. Wants to spend a lot more on basic research. No apologies for supporting TARP or RomneyCare.

Obama’s union error

Mar 2, 2010 16:27 UTC

The great Ed Yardeni thinks the POTUS is repeating FDR’s mistakes:

In 2016, I expect that Mr. Geithner will make the following speech: “We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and if I am wrong … somebody else can have my job. I want to see this country prosperous. I want to see people get a job … We have never made good on our promises … I say after eight years of this Administration we have just as much unemployment as when we started … and an enormous debt to boot.”

Those words were actually spoken by FDR’s Treasury Secretary Henry Morgenthau before his fellow Democrats on the House Ways and Means Committee. Revisionist conservative-leaning historians are increasingly blaming FDR’s policies for prolonging and deepening the Great Depression. A recent addition to this perspective is “The Forgotten Man: A New History of the Great Depression” (2007) by Amity Shlaes. She followed it up with an interesting article in the WSJ on Feb. 1 this year, “How to Make a Weak Economy Worse.” She observed that FDR’s anti-business policies were bad for business. She notes, “The 1935 Wagner Act was a tiger that makes today’s union law look like a pussycat. It favored unions over companies in nearly every way, including institutionalizing the closed shop. And after Roosevelt’s landslide victory in 1936, the closed shop and the sit-down strike stole thousands of productive workdays from companies, punishing earnings and limiting ability to hire.”

In yesterday’s WSJ, we learned that the Obama administration is considering union-backed proposals to make it easier for government agencies to bypass low bidders and award contracts to higher bidders that pay more wages and benefits. The AFL-CIO labor federation is pushing for a jobs program called “Jobs Now Make Wall Street Pay.” They want a transaction tax on securities trading to pay for yet another infrastructure spending program.


Revisionist economic historians are anti-labor, just as Holocaust revisionists are anti-you-know-what. Cite them with caution.

Oh, and if you don’t like labor guilds, unions and what they stand for, Jim, namely equal rights, safe workplace environments and decent conditions for working people, which is the antithesis of what we have now, don’t beat about the Bush – just come right out and say so.

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Zuckerman for Senate?

Mar 2, 2010 15:59 UTC

Heavens, a Mort Zuckerman bid for US Senate in New York would be great fun. Not a guy who loves to press the flesh, but supersmart and interested in getting things done. I just wonder if these CEOs who want to go to Washington fully realize how incredibly boring being a senator is.

Of course, he won’t have to spend loads of time raising money. So that helps. (One of the interesting nuggets from Game Change, the 2008 presidential campaign book, is just how much Hillary hated raising money.)  Disclaimer: I worked for Mr. Z  for a dozen years at U.S.News & World Report.

Austerity makes for bad politics

Mar 1, 2010 17:19 UTC

It looks like the Conservatives in Britain are getting worried that their emphasis on deficit reduction is hurting the party with voters. Labour seems to be catching up in the polls:

The prospect of a hung parliament frightens financial markets, which fear a minority or coalition government would shy away from tough action on the deficit, which is set to exceed 12 percent of GDP this year, a level similar to that of crisis-hit Greece.

Labour plans to halve the deficit in four years with cuts starting next year but says turning off economic stimulus taps now could derail a tentative recovery from a deep recession. The Conservatives say this is too little, too late. They pledge to make an “early start” on deficit cutting if they win power, saying delay could cause a crisis of investor confidence and push up interest rates, but they have not given any figures.

The Conservatives’ uncompromising message on the need for belt-tightening may have turned off some voters, who fear public spending cuts could lead to job losses and poorer services. “The ‘age of austerity’ is a sound bite too far,” said Tim Bale, senior lecturer in politics at Sussex University and author of a recent book on the Conservatives.

Me: A Cameron loss would surely be noted in Washington as another lesson that root-canal economics doesn’t sell. Rather than a Deficit Commission, someone should suggest a Growth Commission to recommend ways to boost long-term economic growth in a fiscally responsible way.


Spending reduction may not be popular, but focusing on growth rather than reduced spending always results in not reducing spending.

Also, politicians boosted growth by lowering mortgage lending standards. That’s how we got into this financial mess. It also keeps politicians in place as social engineers, this time responsible for allocating resources so the economy grows. This government-knows-best-politicians-as-tec hnocrat is the mindset that must be broken.

Limited gov’t will by definition keep resources in the private sector with which the people can construct their own safety nets.

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