James Pethokoukis

Politics and policy from inside Washington

TARP reconsidered

Oct 4, 2010 16:28 UTC

Interesting piece by former FDIC head Bill Isaac on the bank bailout:

In truth, customers of money market funds had already been calmed when Treasury issued a 100% guarantee of their money – before TARP was enacted.  The FDIC had the authority to reassure depositors under existing law, as was in fact done shortly after the TARP was enacted.

Two weeks after the TARP was enacted, Paulson abandoned the toxic asset plan and announced that the money would instead be used to shore up the capital of banks.  I had argued against the TARP in part because I believed capital infusions would support much more new lending than would the purchase of toxic assets.  Moreover, I believed capital infusions would be far less costly to taxpayers.

However, the TARP was not needed for capital infusions because the FDIC had existing authority to provide capital to banks.  I preferred strongly that the FDIC manage a capital infusion program rather than the highly politicized program Treasury implemented.

Treasury made two egregious mistakes on the capital program and many smaller ones.  The first blunder was to order nine large financial institutions – CitiGroup, JPMorgan Chase, Wells Fargo, Goldman Sachs, Bank of America, Bank of New York/Mellon, Merrill Lynch, Morgan Stanley and State Street – to accept $125 billion of taxpayer money that most of them did not need or want.

To some extent he adopts the John Taylor theory that it was the chaotic nature of the TARP roll-out that destabilized markets. Yet he also says he was in favor of capital injections.


“Now let us look at Wal-Mart again; you buy a product there, 6% goes to the employees, 10-18% is profit to the company, 25% goes to other costs and 50% goes to re-stock or the cost of goods sold. Of the 50% about 20-25% goes to China, a guess, but you get the point. Now then, how long will it take at 433 Billion dollars at year for China to have all of our money, leaving no money flow for us to circulate? At a 17 Trillion dollar economy less than 40-years minus the 1/6 they buy from us. Some say that if we keep putting money into our economy, it would take forever, but if we do not then eventually all the money flow will go. If China buys our debt then eventually they own us, no need to worry about a war, they are buying America, due in part to our own mismanaged trade, so whose fault is that? Not necessarily China, as they are doing what’s in the best interests, and we should make sure that trade is not only free, but fair too.”

http://www.worldthinktank.net/pdfs/TheFl owofTrade.pdf

on Wal*Mart’s China web page!

“Walmart China firmly believes in local sourcing. We have established partnerships with nearly 20,000 suppliers in China. Over 95% of the merchandise in our stores in China is sourced locally. Meanwhile, Walmart is committed to local talent development and diversity, especially the cultivation and full utilization of female staff and executives. 99.9% of Walmart China associates are Chinese nationals. All our stores in China are managed by Chinese local talent. 43% of leaders at senior manager level and above are female. In 2009, the company established the “Walmart China Women’s Leadership Development Commission” for driving women’s career development.”

http://www.wal-martchina.com/english/wal mart/index.htm

Now, with a six to one trade deficit with China….when was the last time you seen a George Washington..!!!!

Retail makes NOTHING…

Governments only make MORE DEBT…

It’s time for less of those two and for America to get back to what it does best….MAKE STUFF..

cause George Washington on that dollar can’t help anyone in the United States of America if he is being held in a foreign hand.

Made In America is the only way out of this mess cause foreign made put US here.

Posted by madmilker | Report as abusive

The politics of the bailout

Nov 23, 2009 19:33 UTC

From the Times:

Dominique Strauss-Kahn told the CBI annual conference of business leaders that another huge call on public finances by the financial services sector would not be tolerated by the “man in the street” and could even threaten democracy.

“Most advanced economies will not accept any more [bailouts]…The political reaction will be very strong, putting some democracies at risk,” he told delegates.

“I do believe that the financial sector needs to contribute both to the costs of the financial crisis and to reduce recourse to public funds in the future,” he said.

Me: In the US, TARP and bailouts are already transforming the political landscape, giving rise to the Tea Party movement and creating anti-Wall Street sentiment on the left and right.

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.

Two cheers for Goldman Sachs

Jul 20, 2009 20:18 UTC

The PR folks working for Big Oil have to be breathing a sigh of relief these days. All the populist outrage that is usually spewed at the Exxons and Halliburtons of the world is being  redirected at Goldman Sachs — and its gleaming, glittering $2.7 billion second-quarter profit amid the wreckage of the American financial system.

The specific charge is that Goldman is supposedly making big profits via risky trading activities financed, in effect, by Uncle Sam.  Two pieces of evidence here: First, Goldman’s Value-at-Risk measure, a much-debated way of calculating daily losses, has  been steadily increasing.

Second, Goldman is benefiting from several government interventions and programs — such as the guarantee of its debt, an ability to tap the Fed’s discount window and its implicit too-big-to-fail status — that give it access to supercheap capital (thus the snarky nicknames “Government Sachs” and “Goldie Mac”).

To those who hate Goldman as a symbol for modern capitalism, that evidence is merely a current reaffirmation that the firm is a “great vampire squid wrapped around the face of humanity,” as a recent Rolling Stone article put it.

Rather than an example of succubus capitalism, a more reasoned and clear-headed analysis would see Goldman’s government-enabled success as a market distortion caused by an unprecedented government intervention into the private economy.

And to the extent that such fat profits would not exist without government and taxpayer backing, what should be government’s response to the distortion? New regulations to limit trading activities, perhaps, or a bailout tax paid by Goldman and other TBTF firms (We’re looking at you, JPMorgan.)

Then again, maybe what’s necessary is to remove the distortion. This is all so reminiscent of the constant worrying by good-government types about the influence of lobbyists and campaign cash on the political process. The usual suggested remedy is limits on political donations, whether in the form of cash or cash-in-kind such as independently produced political advertisements.

Of course, lobbying government is a rational response when government can tax, spend, regulate and subsidize this or that business activity to the tune of trillions of dollars every year. (Now there’s your vampire squid.)

So why not try an alternative response: Shrink government largess and power, thus reducing the need and incentive to influence it with campaign cash.

Goldman plays the lobbying game. During the 2008 campaign, the company (via its political action committee and employees) donated just under $1 million to the Obama campaign and just under a quarter of a million to the McCain campaign. And right now, it is unapologetically playing the bailout game, too.

It’s also worth keeping in mind that to some extent Team Obama wants banks to play the game, to take advantage of  government financing (as well as the Fed’s zero interest rate policy) to earn their way out of trouble and avoid nationalization or further direct federal financial aid needing congressional approval

Of course, if Goldman is out of the woods and acting more like a hedge fund than a bank, then perhaps it should be stripped of bank status and cut off from all government aid, as Charlie Gasparino of CNBC has suggested.

Yet even then, Goldman will still benefit from the implied TBTF guarantee. So one possible solution is to end that market distortion by preventing financial institutions from getting big enough to need rescue. Even better would be to end market expectations of government rescue, though that doesn’t seem likely under the current administration, which has embraced the TBTF policy by advocating the creation of a systemic risk regulator to monitor such firms.

Yet even then, Goldman, thanks to its huge role on Wall Street and Washington, is likely to be a popular target for populists across the political spectrum. What academic Bernard Lewis has said of the West also seems true of Goldman: “It is not possible to be rich, strong, and successful and be loved by those who are none of these things.”

Oh, and if Goldman is capable of generating bubbles, as the Rolling Stone article suggests, it might want to gin one up in oil and get people agitated about Big Oil again.


I would be interested in hearing the specifics of what exactly the government created market distortion Goldman is profiting from and why Goldman is unique in their ability to profit from it.