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.
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James Pethokoukis is the Money & Politics columnist and blogger for Reuters where he covers the nexus of Washington and Wall Street.Previously he was the economics columnist and business editor at U.S.News & World Report magazine. Pethokoukis is also an official CNBC contributor and appears frequently on that network's Kudlow Report, Power Lunch, and The Call shows. In addition, he has appeared numerous times on MSNBC, Fox News Channel, Fox Business Network, CNN, and Nightly Business Report on PBS.
A 1989 graduate of Northwestern University where he double majored in Soviet politics and American history and a 1991 graduate of the Medill School of Journalism, Pethokoukis is a 2002 Jeopardy! champion. Pethokoukis can be reached at james.pethokoukis@thomsonreuters.com. James Pethokoukis Feeds Subscribe to all posts via RSS (What is RSS?) Recent Posts GMAC, CIT provide more reasons to roll up TARP Larry Summers: Tax increases won’t hurt economy Can the US keep financing its debt? Barney Frank: Let’s pack the Fed with doves Economic fears drive Pelosi’s healthcare push healthcare reform stimulus Obamanomics Social Security GM housing policy 2008 financial crisis economic policy VAT globalization global economy unemployment executive pay 2012 election bond market 2010 election financial regulatory reform China environment national debt Ron Paul budget deficit inflation Long Recession recession economy budget deficits Lost Decade tax competition Lawrence Kudlow Federal Reserve TARP Fed Watch green economics cap-and-trade Ben Bernanke mustard seeds Great Recession climate change tax policy economic growth the dollar Congressional Budget Office taxes bond vigilantes Archives November 2009 October 2009 September 2009 August 2009 July 2009 June 2009 May 2009 Blogroll Bizzy Blog Calafia Beach Pundit Capital Gains and Games Econbrowser EconLog Enterprise Fundmastery Instapundit Kudlow’s Money Politics Power Line RealClearMarkets Say Anything The Everyday Economist
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