Topic: Government and Politics

Carping about TARP

In its story yesterday about Obama pushing for release of the second half of the TARP boodle, the New York Times reported that

Lawmakers are angry about many aspects of the  bailout, which they intended for the government purchase of troubled assets, particularly mortgage-backed securities, but instead has been used  to recapitalize banks and even prop up failing Detroit automakers.

Initially, I had a lot of sympathy for this critique.  I had a little burst of outrage myself right before Christmas when I read the following quote from White House spokesman Tony Fratto, explaining why the White House was going to use the TARP authority to bail out GM and Chrysler–despite Congress’s having just voted down the auto bailout:

“Congress lost its opportunity to be a partner because they couldn’t get their job done,” Fratto said. “This is not the way we wanted to deal with this issue. We wanted to deal with it in partnership. What Congress said is … ‘We can’t get it done, so it’s up to the White House to get it done.’ “

So by not giving the president the power to bail out the automakers, Congress has “lost its opportunity to be a partner,” and the president’s going to do it anyway?  By what authority?  The TARP statute gives the Secretary of the Treasury the power to buy “troubled assets” from “financial institutions.”  Yet in the past three months TARP’s morphed from a plan to buy toxic mortgage-backed securities, to one that involves buying shares in banks (like Wells Fargo ) that aren’t themselves troubled, to a program giving loans to car companies, which surely can’t qualify as “financial institutions.”

More Bush administration lawlessness, I thought.  We already knew they didn’t care about the Constitution.  Now they’re showing they can’t be restrained by plain statutory language. 

And then I looked at the statute.  And it turns out the definitions of “troubled asset” and “financial institution” are so gobsmackingly, irresponsibly broad, that the administration has at least a colorable argument that it can legally reshape the bailout in the ways it has. ”Troubled assets” include:

any… financial instrument that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability 

And “financial institution”:

means any institution, including, but not limited to, any bank, savings association, credit union, security broker or dealer, or insurance company, established and regulated under the laws of the United States or any State, territory, or possession of the United States [emphasis added]

That’s why, as the University of Chicago’s Randy Picker argues, you can probably “fit cars under the TARP.” (For a contrary argument, see here ).

Given how far the administration has pushed loose legislative language in the past, can Congress credibly claim to be surprised here?  Lawmakers may, as the Times reports, be “angry” about the scope of the bailout, but when they write language that broad, their outrage is more than a day late and $700 billion short.

Who’s Blogging about Cato

  • Writing for Independent Advocate, a political blog devoted to “independently minded news analysis,” Wes Kimbell quotes Senior Fellow Richard W. Rhan’s December op-ed about Obama’s proposed stimulus plan.
  • The Hill’s Congress Blog posts analysis from Senior Fellow Michael D. Tanner on Barack Obama’s proposals for Social Security and Medicare.
  • Blogging for the Weekly Standard, Brian Faughnan cites Director of Health Policy Studies Michael F. Cannon’s recent post on Obama’s proposal to eliminate Medicare Advantage, which would oust nine million seniors from their health plans.
  • Baltimore Sun financial columnist and blogger Jay Hancock plugs an upcoming forum at Stanford University on the similarities and differences between liberals and libertarians, featuring Cato Research Fellow Will Wilkinson and Vice President for Research Brink Lindsey.

    Exposing the Keynesian Fallacy: The Condensed Version

    Many of you have seen the video I narrated explaining why big-government “stimulus” schemes do not make sense. That mini-documentary discussed the theoretical shortcomings of Keynesianism and also reviewed the dismal results of real-world Keynesian episodes.

    While the video has been very successful, both measured by the number of “views” and positive feedback, some have suggested that it would be good to produce shorter videos. The hypothesis is that most people have only a limited interest in economics, so a brief video is more likely to attract viewership. My personal bias is that longer videos are sometimes necessary to allow an appropriate level of analysis and explanation, but I do believe in letting the market decide. As such, I invite you to watch this condensed, four-minute video debunking Keynesian fiscal policy.

    Please feel free to provide feedback. For purposes of comparison, the original video can be seen here.

    Questions for Mrs. Clinton

    Hillary Clinton is expected to have a smooth confirmation hearing today. Bizarre. If we had more citizen-legislators instead of professional politicians, some of the following questions would be asked at today’s hearing:

    Did you request, or see, any of the hundreds of FBI files that were improperly acquired by the Clinton White House? Who hired Craig Livingstone anyway?

    Why did you fire Billy Dale?

    What is your view of the war power? Can (Should) the President attack another country without a declaration of war from the Congress?

    What is your view of the Tenth Amendment? Is there any subject beyond the purview of a federal law or spending program?

    Exactly what did you and your Husband take from the White House when you left?

    Did you or your husband make any arrangements to get money to Susan McDougal since Bill left the White House? Do you know why she was pardoned?

    Do you plan to hire Sandy Berger?

    To revisit Clintonian policies and practices, go here and here.

    Of Course That Implies He Had Principles…

    President Bush says that he “chucked aside my free-market principles” when faced with the current financial crisis. Well, duh!

    The president said that he had no choice because he was “concerned that the credit freeze would cause us to be headed toward a depression greater than the Great Depression.” Even if one accepts that rather contestable premise, one is tempted to ask what caused him to chuck aside conservative and free market principles when he:

    • Increased federal domestic discretionary spending (even before the bailout) faster than any president since Lyndon Johnson.
    • Enacted the largest new entitlement program since the creation of Medicare and Medicaid, an unfunded Medicare prescription drug benefit that could add as much as $11.2 trillion to the program’s unfunded liabilities;
    • Dramatically increased federal control over local schools while increasing federal education spending by nearly 61 percent;
    • Signed a campaign finance bill that greatly restricts freedom of speech, despite saying he believed it was unconstitutional;
    • Authorized warrantless wiretapping and given vast new powers to law enforcement;
    • Federalized airport security and created a new cabinet-level Department of Homeland Security;
    • Added roughly 7,000 pages of new federal regulations, bringing the cost of federal regulations to the economy to more than $1.1 trillion;
    • Enacted a $1.5 billion program to promote marriage;
    • Proposed a $1.7 billion initiative to develop a hydrogen-powered car;
    • Abandoned traditional conservative support for free trade by imposing tariffs and other import restrictions on steel and lumber;
    • Expanded President Clinton’s national service program;
    • Increased farm subsidies;
    • Launched an array of new regulations on corporate governance and accounting; and
    • Generally did more to centralize government power in the executive branch than any administration since Richard Nixon.

    One begins to detect a trend.

    Making Work, Destroying Wealth

    Journalists are telling us that John Maynard Keynes, the intellectual inspiration of the New Deal and its tax-and-spend philosophy, is all the rage again. The Wall Street Journal offers an interesting vignette on Keynes’s view of how to create jobs:

    Drama was a Keynes tool. During a 1934 dinner in the U.S., after one economist carefully removed a towel from a stack to dry his hands, Mr. Keynes swept the whole pile of towels on the floor and crumpled them up, explaining that his way of using towels did more to stimulate employment among restaurant workers.

    Now I should say that various people report this story, including Ludwig von Mises, but no one cites an original source. Assuming it’s true, though, it just seems to underline the absurdity of the whole “make-work” theory that is back in vogue. Keynes’s vandalism is just a variant of the broken-window fallacy that was exposed by Frederic Bastiat, Henry Hazlitt, and many other economists: A boy breaks a shop window. Villagers gather around and deplore the boy’s vandalism. But then one of the more sophisticated townspeople, perhaps one who has been to college and read Keynes, says, “Maybe the boy isn’t so destructive after all. Now the shopkeeper will have to buy a new window. The glassmaker will then have money to buy a table. The furniture maker will be able to hire an assistant or buy a new suit. And so on. The boy has actually benefited our town!”

    But as Bastiat noted, “Your theory stops at what is seen. It does not take account of what is not seen.” If the shopkeeper has to buy a new window, then he can’t hire a delivery boy or buy a new suit. Money is shuffled around, but it isn’t created. And indeed, wealth has been destroyed. The village now has one less window than it did, and it must spend resources to get back to the position it was in before the window broke. As Bastiat said, “Society loses the value of objects unnecessarily destroyed.”

    And the story of Keynes at the sink is the story of an educated, professional man intentionally acting like the village vandal. By adding to the costs of running a restaurant, he may well create additional jobs for janitors. But the restaurant owner will then have less money with which to hire another waiter, expand his business, or invest in other businesses. Before Keynes showed up in town, let us say, the town had three restaurants among its businesses, each with neatly stacked towels for guests. After Keynes’s triumphant speaking tour to all the Rotary Clubs in town, the town is exactly as it was, except the three restaurants are left to clean up the disarray. The town is very slightly less wealthy, and some people in town must spend scarce resources to restore the previous conditions. The man built an economic theory on this!

    Now we are told that “Keynes is back,” and we need a new New Deal, and the Obama administration is going to create millions of jobs by shuffling money through the federal government. And the theoretical underpinning of this plan comes from a man who thought you could stimulate employment by breaking things.

    As Jerry Jordan wrote in the Cato Journal, the real challenge for society is not creating jobs but creating wealth – that is, a higher standard of living for more people. There are many destructive ways, beyond messing up the towels in a restroom, to create jobs:

    I am reminded of a story that a businessman told me a few years ago. While touring China, he came upon a team of nearly 100 workers building an earthen dam with shovels. The businessman commented to a local official that, with an earth-moving machine, a single worker could create the dam in an afternoon. The official’s curious response was, “Yes, but think of all the unemployment that would create.” “Oh,” said the businessman, “I thought you were building a dam. If it’s jobs you want to create, then take away their shovels and give them spoons!”

    President-elect Obama proposes that the federal government “create or save” jobs by spending upwards of $600 billion. Where would this money come from? If it comes from taxes, it will be taken out of the more efficient private sector to be spent in the less efficient government sector, and the higher tax rates will discourage work and investment. If it is borrowed, it will again simply be transferred from market allocation to political allocation, and our debt burden will grow even greater. And if the money is simply created out of thin air on the balance sheets of the Federal Reserve, then it will surely lead to inflation.

    There is no magic road to wealth. You have to work, save, and invest. And when the government lures individuals and businesses into making bad investments with cheap money, the malinvestment has to be liquidated. Avoiding that truth, prolonging the process of adjustment, is a good way to turn a recession into a depression. And you can’t get economic growth back by breaking windows, throwing towels on the floor, or spending money you don’t have.

    Obama Backs Off Hiring 600,000 More Bureaucrats?

    In his weekly radio address on January 4, President-elect Obama promised that his economic plan would “create three million new jobs, more than eighty percent of them in the private sector.” Dan Mitchell pointed out that that suggested that he intended to hire 600,000 new bureaucrats. That point got some attention, and apparently it actually made Obama and his supporters nervous.

    Because in his January 11 radio address, he promised that 90 percent of the jobs he creates or saves will be in the private sector. And interestingly, both the Washington Post and the New York Times put that in the first sentence of their page-one stories on Sunday. This was the first sentence in the lead story in the Sunday Post:

    Facing increased skepticism from both parties about the details of his economic stimulus proposal, President-elect Barack Obama and his team yesterday laid out new claims regarding the $775 billion package, saying that 90 percent of the jobs produced would be in the private sector, including hundreds of thousands in construction and manufacturing.

    Well, it’s good to know that the Obama team is now thinking about – or at least wants us to think they’re thinking about – creating private-sector jobs rather than just hiring more bureaucrats. Of course, we still have the problem that huge government spending programs won’t actually create jobs.