Jack Kelly: (America) Marching Off a Cliff

Written by Jack Kelly   
Friday, 26 December 2008
Act in haste, repent at leisure.

Back in October, when Congress was stampeded into approving a commitment of up to $700 billion to bail out banks who invested in mortgage-backed securities, we were told the money would be used to make a market for these now toxic financial instruments.

After Congress approved the Troubled Asset Relief Program (TARP), Treasury Secretary Henry Paulson changed strategy.  Rather than use the first $350 billion to buy up subprime mortgages, the government invested it in the banks themselves.

The Associated Press contacted 21 of the 116 banks that received federal money and asked them what they've done with it.  None were willing to say.

Their reticence was understandable, another AP story indicated.

"The 116 banks that so far have received taxpayer dollars to boost them through the economic crisis gave their top tier executives nearly $1.6 billion in salaries, bonuses and other benefits in 2007," the AP reported Monday.

"That amount, spread among the 600 highest paid bank executives, would cover the bailout money given to 53 of the banks that have shared the $188 billion that Washington has doled out in rescue packages so far."

The data, which the AP culled from the annuals reports the banks file with the Securities and Exchange Commission, are from last year.  We don't yet know what the bank executives were paid for 2008, or if any bailout money was used to compensate them.  But the reticence of the banks to discuss what they've done with the money isn't encouraging.

The economy has shrunk since the bailout bill was approved.  Things would have been much worse if the bill hadn't passed, say its proponents.  But there is precious little evidence to indicate it is helping very much.

"In the first public hearing of the Congressional Oversight Panel -- a three-member board mandated to keep close watch on the bailout program enacted in October  -- economists, local bankers, beleaguered homeowners and government officials said here Tuesday that the billions of dollars paid out by Washington to the banking industry were not filtering down and that Nevada's desperate condition was growing worse," the Los Angeles Times reported from Las Vegas Dec. 17.

I supported the bailout bill in October.  I still think it was necessary to keep the credit markets from freezing up.  But I doubt it would have passed if Congress knew then that Secretary Paulson would not use the money for the stated purpose.

"I feel as though the rug has been pulled out from under me," said economist/investor Larry Kudlow. "Once you stuff money into the banks, you create a political argument for stuffing money everywhere else."

President Bush likely opened the floodgates when he decided to give the remaining $13.4 billion of the first tranche of TARP funds to Chrysler and General Motors so they could keep their lights on and their doors open until March.

The political logic is compelling.  If we're going to give hundreds of billions of dollars to wealthy bankers whose greed and stupidity is largely responsible for the mess we're in, what's a few billion more for auto workers?

But there are two major differences between the bank bailout and the auto bailout.  The lesser is there actually is a very good chance the banks will repay the money invested in them, while the dim prospects that Chrysler and GM could ever again be profitable depend on labor concessions the UAW has made it clear it will not make.

The greater difference is the bank bailout was designed to prevent the entire economy from collapsing.  The auto bailout is for a specific industry.  Other failing industries -- ethanol manufacturers, commercial realtors -- are lining up for handouts of their own.

And it ought to matter to more people than evidently it does that the legislation Congress passed gave the president absolutely no authority to use TARP money to bail out Detroit.

We are marching down a path our Founding Fathers never would have trod.  It leads to a cliff.