‘We Are Not Deciding between Regulation and Autonomy, We Are Deciding Whether or Not We Want a Puppet Government’
That’s how Charlie Arlinghaus, president of New Hampshire’s Josiah Bartlett Center for Public Policy, describes the decision confronting states about whether to create an ObamaCare Exchange in this op-ed for the New Hampshire Union-Leader.
Filed under: General; Government and Politics; Health Care; Political Philosophy
Let’s Divest of GM Yesterday
Writing in today’s Washington Post, Charles Lane posits that the time is now for the U.S. Treasury to divest of its remaining 500 million shares of General Motors stock. I agree with that conclusion, but not with Lane’s rationale or his recommendation for a heavy-handed, government-imposed exit strategy.
Just to recap: the Treasury recouped $23 billion of taxpayers’ $50 billion outlay when it sold GM shares to the public in an IPO in November 2010; the outstanding 500 million shares in government coffers must be sold at an average price of $54 to recover the remaining $27 billion; the IPO price was $33; today’s price is $21.69. If all 500 million shares could be sold at today’s price, the Treasury would raise $10.8 billion, leaving taxpayers at a loss of just over $16 billion. (Of course, the sale of such a large number of shares would drive the average selling price way below today’s price, resulting in a much larger taxpayer loss.)
Lane is correct to conclude that GM’s immediate future isn’t looking quite so rosy. Demand is tanking in Europe. Concerns remain about whether GM will continue to be able to fund its $128 billion pension plan. And sales of the “game-changing” Chevy Volt have been lagging since the vehicle’s commercial introduction some 13 months ago—well before its engines demonstrated an annoying propensity to spontaneously combust. (Not to worry, says GM’s public relations team: the engines don’t seem to catch fire while being driven, only an hour or two after they’ve been parked in the garage.) Recognizing that that qualifier hasn’t been reassuring enough, GM is now offering to buy back any Chevy Volt it has ever sold, which doesn’t bode well for the bottom line, but also affirms how few of these Government Motors show pieces have even sold.
That grim analysis is the basis for Lane’s preference for government divestment now. There is more downside risk than upside potential. It is an argument based on market-timing, rather than on the principle that bad things happen when the government has a stake in the outcome of a race that it can influence. Sure, the administration would love to divest of GM at a profit to taxpayers. But the longer it is allowed to wait for that train to arrive, the greater the temptation to grease the skids.
The government should divest now. It should have divested in June, when it was first legally permissible to do so. But the administration (following, by logic, what would have been Lane’s advice at the time) rolled the dice, expecting the stock value to rise. Instead it fell. And then there was this.
But my bigger problem is with Lane’s proposal for a managed divestment. He writes:
It’s time to cut our losses. Treasury should start selling its stake in GM.
And I know just the buyer: GM. The company is sitting on more than $33 billion in cash, about triple the market value of Treasury’s 500 million shares, which is roughly $10.8 billion.
Though GM wants to dedicate much of its cash to shoring up its pension plan, it could still absorb most or all of Treasury’s shares, even if Treasury charges a modest premium over the current market price, as it should.
Lane proposes this under the guise of some perverse fealty to a “free-enterprise economy,” as it would spare shareholders from the stock price-depressing impact of an unnatural 500 million share dump. But those shareholders knew the risks they were taking when they purchased GM stock in the first place. They certainly knew that the largest single shareholder didn’t intend to hold its position for very long. Lane’s argument for protecting those shareholders in the name of free-enterprise in unconvincing, if not misplaced.
Furthermore, Lane’s zeal for sticking it to GM seems to eclipse any real commitment to free markets. Forcing GM to divert resources from where management wants to commit them in order to achieve some favorable political outcome (a smaller taxpayer loss) is just as coercive as some of the administration’s actions on the road to GM’s nationalization in the first place.
GM should not be entitled to any favors or exceptional treatment by virtue of its ownership structure. To be certain of that, it should be 100 privatized yesterday. But likewise, GM should not be subject to compensatory or otherwise countervailing policies designed to punish or remove any perceived advantage. For starters, it is impossible to measure the benefits received or the penalties suffered with any precision. Demanding that GM not be exposed to special treatment goes in both directions.
The Euro Crisis in Prose and Poetry
The European debt crisis is inspiring public radio to literary analysis. Last week NPR’s Planet Money put the French-German relationship into a “threepenny opera”:
All
Everyone is counting on you
You’ve got the money
We’ve got the debt (Oh yes, we’ve got a lot of debt!)
And do we need a bailout—you betGermany
Zat’s it, I’ve had enough
Looks like it’s time now for me to leave…France
Oh?
Germany
Vhy is ze door locked? You must let me out.
France
Dear when the times are tough
It’s better to give zan to receive
Then Monday Marketplace Radio turned to classics professor Emily Allen Hornblower and economist Bill Lastrapes to discuss Greek debt as classical tragedy—Oedipus? The ant and the grasshopper?
Loyal Cato readers will recognize Bill Lastrapes as the coauthor of the much-discussed Cato Working Paper “Has the Fed Been a Failure?”
And then, if you prefer prose and sober analysis to literary analogies, let me recommend Holman Jenkins’s perceptive column on why Europe hasn’t solved its crisis yet, which unfortunately appeared in the less-read Saturday edition of the Wall Street Journal. (OK, not less read than Cato-at-Liberty, but probably less read than the weekday Journal.)
Neither leader has an incentive to sacrifice what have become vital and divergent interests to produce a credible bailout plan for Europe. To simplify, German voters don’t want to bail out French banks, and the French government can’t afford to bail out French banks, when and if the long-awaited Greek default is allowed to happen….
There is another savior in the wings, of course, the European Central Bank. But the ECB has no incentive to betray in advance its willingness to get France and Germany off the hook by printing money to keep Europe’s heavily indebted governments afloat. Yet all know this is the outcome politicians are stalling for. This is the outcome markets are relying on, and why they haven’t crashed.
All are waiting for some market ruction hairy enough that the central bank will cast aside every political and legal restraint in order to save the euro….
And then the crisis will be over? Not by a long shot.
All these “solvent” countries and their banks will be dependent on the ECB to keep them “solvent,” a reality that can only lead to entrenched inflation across the European economy. That is, unless these governments undertake heroic reforms quickly to restore themselves to the good graces of the global bond market so they can stand up again without the ECB’s visible help.
It’s just conceivable that this might happen—that countries on the ECB life-support might put their nose to the grindstone to make good on their debts, held by ECB and others. Or they might just resume the game of chicken with German taxpayers, albeit in a new form, implicitly demanding that Germany bail out the ECB before the bank is forced thoroughly to debauch the continent’s common currency, the euro.
Should American Taxpayers Finance another Big Fat Greek Bailout?
It appears that American taxpayers are about to subsidize another Greek bailout (via the Keystone Cops at the IMF). This is way beyond economically foolish. It is also morally offensive.
To turn Winston Churchill’s famous quote upside down, “Never have so many paid so much to subsidize such an undeserving few.”
Let’s start with a few facts:
- Greece’s GDP is roughly equal to the GDP of Maryland.
- Greece’s population is roughly equal to the population of Ohio.
- Despite that small size, in both terms of population and economic output, Greece already has received a bailout of about $150 billion (actual amount fluctuates with the exchange rate).
- Don’t forget the indirect bailout resulting from purchases of Greek government bonds by the European Central Bank.
- Now Greece is angling for another bailout of about $150 billion.
Is there any possible justification for throwing good money after bad with another bailout? Well, if you’re a politician from Germany or France and your big banks (i.e., some of your major campaign contributors) foolishly bought lots of government bonds from Greece, the answer might be yes. After all, screwing taxpayers to benefit insiders is a longstanding tradition in Europe.
But from a taxpayer perspective, either in Europe or the United States, the answer is no. Or, to be more technical and scientific, the answer is “Heck no, are you friggin’ out of your mind?!”
Consider these fun facts from a recent column by John Lott and then decide whether the corrupt politicians of Greece (and the special interest groups that receive handouts and subsidies from the Greek government) deserve to have their hands in the pockets of American taxpayers:
Despite Greece’s promises, government spending is up over last year’s already bloated levels, the deficit is bigger than ever, and it has utterly failed to meet the promised sell-off of some government assets. Not a single public bureaucrat has been laid off so far. …Greece can pay off €300 of the €347 billion debt by selling off shares the government owns in publicly traded companies and much of its real estate holdings. The government owns stock in casinos, hotels, resorts, railways, docks, as well as utilities providing electricity and water. But Greek unions fiercely oppose even partial privatizations. Rolling blackouts are promised this week to dissuade the government from selling of even 17 percent of its stake in the Public Power Corporation. …Greeks apparently believe that they have Europe and the world over a barrel, that they can make the rest of the world pay their bills by threatening to default. Greece’s default would be painful for everyone, but for Europe and the United States, indeed for the world, the alternative would be even worse. If politicians in Ireland, Portugal, Spain, Italy, and other countries think that their bills will be picked up by taxpayers in other countries, they won’t control their spending and they won’t sell off assets to pay off these debts. Countries such as Greece have to be convinced that they will bear a real cost if they don’t fix their financial houses while they still have the assets to cover their debts. …The real problem is the incentives we are giving to other countries. We have to make sure that “Kicking the can down the road” isn’t an option.
Just for good measure, here are a few more interesting factoids in a Wall Street Journal column by Holman Jenkins.
[Greece is] one of the most corrupt, crony-ridden, patronage-ridden, inefficient, silly economies in Christendom. …The state railroad maintains a payroll four times larger than its ticket sales. When a military officer dies, his pension continues for his unwed daughter as long as she remains unwed. Various workers are allowed to retire with a full state pension at age 45.
To be blunt, Greek politicians have miserably failed. Wait, that’s not right. You can’t say someone has failed when they haven’t even tried. Let’s be more accurate and say that Greek politicians have succeeded. They have scammed money from taxpayers in other nations to prop up a venal and corrupt system of patronage and spoils. Sure, they’ve made a few cosmetic changes and trimmed around the edges, but handouts from abroad have enabled them to perpetuate a bloated state. And now they’re using a perverse form of blackmail (aided and abetted by big banks) to seek even more money.
The “I-Told-You-So” Blog Post about the Completely Predictable Failure of the Greek Bailout
Way back in February of 2010, I wrote that a Greek bailout would be a failure. Not surprisingly, the bureaucrats at the International Monetary Fund and the political elite from other European nations ignored my advice and gave tens of billions of dollars to Greece’s corrupt politicians.
The bailout happened in part because politicians and international bureaucrats (when they’re not getting arrested for molesting hotel maids) have a compulsion to squander other people’s money. But it also should be noted that the Greek bailout was a way of indirectly bailing out the big European banks that recklessly lent money to a profligate government (as explained here).
At the risk of sounding smug, let’s look at my four predictions from February 2010 and see how I did.
1. The first prediction was that “Bailing out Greece will reward over-spending politicians and make future fiscal crises more likely.” That certainly seems to be the case since Europe is in even worse shape, so I’ll give myself a gold star.
2. The second prediction was that “Bailing out Greece will reward greedy and short-sighted interest groups, particularly overpaid government workers.” Given the refusal of Greek politicians to follow through with promised cuts and privatizations, largely because of domestic resistance, it seems I was right again. As such, I’ll give myself another pat on the back.
3. My third prediction was that “Bailing out Greece will encourage profligacy in Spain, Italy, and other nations.” Again, events certainly seem to confirm what I warned about last year, so let’s put this one in the win column as well.
4. Last but not least, my fourth prediction was that “Bailing out Greece is not necessary to save the euro.” Well, since everybody is now talking about two possible non-bailout options—either a Greek default (a “restructuring” in PC terms) or a Greek return to using the drachma—and acknowledging that neither is a threat to the euro, it seems I batted 4-4 in my predictions.
But there’s no reward for being right. Especially when making such obvious predictions about the failure of big-government policies. So now we’re back where we were early last year, with Greece looking for another pile of money. Here’s a brief blurb from Reuters.
The European Union is racing to draft a second bailout package for Greece to release vital loans next month and avert the risk of the euro zone country defaulting, EU officials said on Monday.
If this second bailout happens (and it probably will), then I will make four new predictions. But I don’t need to spell them out because they’ll be the same ones I made last year.
We’ve reached the lather-rinse-repeat stage of fiscal collapse for the welfare state.
Ben Bernanke: Central Planner
There’s a great piece in the spring issue of The Independent Review on Federal Reserve Chairman Ben Bernanke by San Jose State Professor Jeffrey Rogers Hummel. Although a bit long, its well worth the read for anyone wanting to understand both Bernanke’s thinking and his actions during and since the financial crisis.
First, Prof. Hummel discusses the differences between Bernanke’s and Milton Friedman’s explanations for the Great Depression. Those that debate whether Bernanke’s actions, especially the quantitative easings, would be approved of by Friedman will get a lot out of this discussion. From this comparison, you get the point that Friedman was concerned about overall credit conditions and liquidity, whereas Bernanke is less focused on the monetary factors than on the impairment of credit intermediation, which explains his support of selective bailouts.
Hummel’s comparison of Greenspan and Bernanke is also insightful, particularly since many (myself included) often lump the two’s policies together. From the analysis, it is clear that Greenspan falls into the Friedman camp, his “rescues” were of the financial system in general, and not of specific firms.
One might say a bailout is a bailout, so what’s the difference between rescuing the system and rescuing individual firms within the system? Certainly that’s a view I have some sympathy for. The “Greenspan put” was as much a contributor to reckless risk-taking as anything else. Hummel, however, discuses why this difference ultimately matters, and why it shows Bernanke to fit the role of economic central planner. In short, the facts are presented that during the financial crisis, Bernanke did not actually increase overall liquidity by much, he re-directed it to those firms he deemed most important. This process of reducing liquidity to some sectors while re-directing it to others, arguably less efficient sectors, goes a considerable distance in explaining some of the decline in both aggregate demand and consumption in 2008.
Again, the piece is one of the more accessible and insightful I’ve read on Bernanke in quite a while.
Bailout Coming for the Postal Service?
The U.S. Postal Service is in financial trouble. Undermined by advances in electronic communication, weighed down by excessive labor costs and operationally straitjacketed by Congress, the government’s mail monopoly is running on fumes and faces large unfunded liabilities. Socialism apparently has its limits.
While the Europeans continue to shift away from government-run postal monopolies toward market liberalization, policymakers in the United States still have their heads stuck in the twentieth century. That means looking for an easy way out, which in Washington usually means a bailout.
Self-interested parties – including the postal unions, mailers, and postal management – have coalesced around the notion that the U.S. Treasury owes the USPS somewhere around $50-$75 billion. (Of course, “U.S. Treasury” is just another word for “taxpayers.”) Policymakers with responsibility for overseeing the USPS have introduced legislation that would require the Treasury to credit it with the money.
Explaining the background and validity of this claim is very complicated. Fortunately, Michael Schuyler, a seasoned expert on the USPS for the Institute for Research on the Economics of Taxation, has produced such a paper.
At issue is whether the USPS “unfairly” overpaid on pension obligations for particular employees under the long defunct Civil Service Retirement System. The USPS’s inspector-general has concluded that the USPS is owed the money. The Office of Personnel Management, which administers the pensions of federal government employees, and its inspector-general have concluded otherwise. Again, it’s complicated and Schuyler’s paper should be read to understand the ins and outs.
Therefore, I’ll simply conclude with Schuyler’s take on what the transfer would mean for taxpayers:
Given the frighteningly large federal deficit and the mushrooming federal debt, a $50-$75 billion credit to the Postal Service and debit to the U.S. Treasury will be a difficult sell, politically and economically. Although some advocates of a $50-$70 billion transfer assert it would be “an internal transfer of surplus pension funds” that would allow the Postal Service to fund promised retiree health benefits “at no cost to taxpayers,” the reality is that the transfer would shift more obligations to Treasury, which would increase the already heavy burden on taxpayers, who ultimately pay Treasury’s bills. (The Congressional Budget Office (CBO) prepares the official cost estimates for bills before Congress. Judging by how it has scored some earlier postal bills, CBO would undoubtedly report that the transfer would increase the federal budget deficit.) For those attempting to reduce the federal deficit, the transfer would be a $50-$70 billion setback.
Sounds like a bailout to me.
See this Cato essay for more on the U.S. Postal Service and why policymakers should be moving toward privatization.
Bill Daley and ‘Too Big To Fail’
MIT Professor Simon Johnson recently argued that Bill Daley’s appointment as Obama’s Chief of Staff signals that “too big to fail,” as it relates to our largest financial institutions, is here to stay. Personally I never thought it was in doubt. With Geithner at Treasury and Dodd-Frank further codifiying “too big to fail,” its been clear for some time that the bailout net is larger than it’s ever been, and is not being pulled back.
That said, Professor Johnson’s focus on Daley distracts from the real issue, which is changing our bank regulatory structure to end bailouts. The focus on Daley has the potential to lead us down that path of “if we just had the right people in government…” We shouldn’t be designing our regulatory structures with the “right” people in mind, but rather with the rule of law in mind. In fact, one of the benefits of the Obama administration is that it serves as a great test of the “right people” hypothesis of government. One is unlikely to see a more left-leaning White House than this one, so if this one gets captured by special interests, including Wall Street, than it’s a safe bet that any future administration will as well.
Since I believe most of us actually want to end “too big to fail,” the real question is how to do it. It strikes me that we have three options: regulate the largest institutions to death (or competitive disadvantage), break them up, or credibly impose losses on their creditors. Ultimately I think the regulation approach is bound to fail, if for no other reason than regulatory capture. (Even Elizabeth Warren seems to get this: “Regulations, over time, fail. I want to see Congress focus more on a credible system for liquidating the banks that are considered too big to fail.”) Breaking them up might sound attractive in theory, but I have a hard time seeing how it truly works in practice. After all, few in Washington viewed Bear Stearns as “too big to fail.” Accordingly, I believe the best approach would be to force creditors to take losses or be converted into equity. To make this credible, we must bind the hands of the regulators. As long as the Fed, Treasury, or the FDIC can inject money, then bailouts are always on the table.
Sadly, what the Daley appointment reminds us is that any attempt to end “too big to fail” will likely have to wait until the next administration. Not only is this one wed to bailouts, the President would likely veto any bill that really tied the hands of the Fed.
A Successful IPO Does Not a Justifiable Bailout Make
There seems to be a lot of confusion about the meaning of GM’s IPO today. A common narrative in today’s media is that GM’s return to the stock market affirms the wisdom of the auto bailout. Some tougher customers in the media insist on a higher threshold being met—that taxpayers get back the entirety of their $50 billion investment in GM—before declaring “mission accomplished.” And then there are the rabid partisans who—in their seething animosity toward the Obama administration—reach conclusions devoid of logic and rich only in conspiratorial-mindedness. For example, yesterday I was contacted by a media outlet vetting this conclusion: “The IPO is evidence of the failure of the bailout because taxpayers were excluded from buying shares at the IPO price and, therefore, denied the opportunity to get their money back.” Huh?
All of those analyses are wrong. Let me dispense with the last one first, as it simply betrays a gross misunderstanding of how taxpayers are on the hook. By divesting of GM (i.e., selling its shares), the government is beginning to make the taxpayer whole. But just as there were no checks written directly from taxpayers to GM, there will be no checks written to taxpayers, as the Treasury liquidates the public’s share of GM. Whether main street Americans could participate in the IPO has nothing to do with making the taxpayer whole. And, by the way, IPOs typically limit sales of shares at the initial price to a chosen few. So let’s just shelve the canned indignation on this claim. It’s a distraction.
Here’s the real issue. Today’s IPO is nothing more than testament to the fact that the government threw GM a lifeline, enabling the company to expunge most of its debts and firm up its balance sheet on terms more favorable than a normal bankruptcy process would have yielded. That enabled GM to partake of the cyclically growing U.S. auto market in 2010 and turn a profit through the first three quarters. So what? Did anyone really think that a chosen company so coddled and insulated from market realities couldn’t turn a short-run profit? Yes, even GM, under those favorable conditions should have been expected to turn a profit this year.
But at what cost? That answer—even the question—seems to be elusive in the public discussion of the IPO. The cost was not only $50 billion—the amount diverted to GM in the first place. Nor was it that $50 billion minus the proceeds raised in today’s IPO (and minus the proceeds raised later when the government divests entirely of GM – it will still hold 33% of GM after today). In other words, making taxpayers whole does not absolve the Bush and Obama administration’s for the auto intervention. Recouping the $50 billion only gets us partially out of the hole. (And I’m not even sure who “us” includes because the costs are so far reaching.)
Yes, GM is making sales and accounting for market share, but only at the expense of the other automakers. Had GM been forced to severely atrophy or liquidate, the other automakers would have had greater revenues, more market share, and probably higher profits). They would have been able to attract GM’s best engineers and line workers. They would have more money to invest in R&D and to lead the industry into the future. Instead, by keeping GM in the mix, some of those industry resources remain misallocated in a company that the evolutionary market process would have made smaller or extinct.
The auto industry wasn’t rescued with the GM bailout. GM was “rescued.” By rescuing GM, the government overrode market forces, and there are significant costs to assign for that. Witness the stagnant economy with 9.6 percent unemployment. Is it not plausible that businesses are sitting on their cash and not investing or hiring because of the fear inspired by the government interventions starting with the bank and auto bailouts? It’s more than plausible. The regime uncertainty that persists to this day was spawned by the GM bailout and other interventions.
What about the weakening of the rule of law? Doesn’t the diversion of TARP funds by the Bush administration, in circumvention of congress’s wishes and in contravention of the language of the law, represent a cost? How about the property right of preferred bondholders who were forced to take pennies on their investment dollars under the Obama bankruptcy plan? Any costs there? What about U.S. moral authority to dissuade other goverments from meddling in their markets or indulging industrial policy? That may be costly to U.S. enterprises. And with the government still holding a third of GM, its hard to swallow the idea that public interest will be the driver of policies affecting the auto industry. And that suggests even more costs.
But don’t mistake this blog post for an anti-IPO rant. I’m in favor of the IPO. It couldn’t have happened sooner. But I suspect the investment bankers, the administration, and the other members of GM’s Board of Directors reckoned that, with the hype over the new Chevy Volt and the recent newsleak of GM’s $43 billion in unorthodox tax deferrments on the balance sheet, now was the perfect time to go public.
More Proof ObamaCare Is a Sop to Industry
Reuters has helpfully published another article demonstrating that ObamaCare‘s biggest cheerleaders are the insurance and drug industries. That’s because, barring repeal and despite the Obama administration’s fatuous rhetoric about standing up to the special interests, ObamaCare will shower those industries with massive subsidies. Excerpts follow.
Health Overhaul Should Press Ahead: Industry
By Susan HeaveyThu Nov 11, 2010 1:39pm EST
NEW YORK (Reuters) – Repeal reform? No thanks, say health insurers, drugmakers and others looking for a clearer picture of the U.S. healthcare market after the bruising passage of the controversial overhaul law…
The new healthcare law created “a stable, predictable environment, however painful it has been in the short term,” GlaxoSmithKline Plc’s (GSK.L) Chief Strategy Officer David Redfern said at the summit in New York.
“When you are running a business, the hardest thing is changing policy and a changing environment because it is very difficult to plan, predict and ultimately invest in that sort of scenario,” he said, echoing other speakers.
True enough. How’s a firm supposed to develop a business plan around uncertain taxpayer subsidies?
Health officials must still hammer out how to implement the law and finalize hundreds of new rules and regulations. Many such details are key, as the sector looks to adjust its business for 2011 and beyond.
Wait, I thought the law created a “stable, predictable environment” and repeal would create uncertainty. Hmmmm.
“Anti-reform made good talking points before the election,” said the Department of Health and Human Services’ Liz Fowler, adding that people “will find more to like than to dislike” in the law once it is more in place.
Boy, they just won’t let go of that chestnut, will they? Remember: voters need re-education, not the Obama administration.
Even insurers, which were vilified by Democrats in passing the reforms, said they don’t want a repeal, even as they push for clarity on forthcoming rules and seek additional changes.
Cigna Corp CEO David Cordani and Aetna Inc President Mark Bertolini both urged the nation to move forward on the overhaul.
Even the insurance industry is against repeal? The folks whose products the law will force 200 million Americans to purchase? Never saw that coming.
Since the start of 2009, the Morgan Stanley Health Care Payor index has risen 75 percent, outperforming a roughly 35 percent rise for the broader Standard & Poor’s 500 index.
You don’t say.
Unlike insurers[!], drugmakers have escaped largely unscathed under the law, although there is still incentive to shape it.
Filed under: Cato Publications; General; Government and Politics; Health Care
ObamaCare = A Bailout for Private Insurance Companies
This Reuters headline says it all: “Cigna CEO: Don’t repeal U.S. health law.”
What Gets You Most Upset about the TARP Bailout, the Lying, the Corruption, or the Economic Damage?
As an economist, I should probably be most agitated about the economic consequences of TARP, such as moral hazard and capital malinvestment. But when I read stories about how political insiders (both in government and on Wall Street) manipulate the system for personal advantage, I get even more upset.
Yes, TARP was economically misguided. But the bailout also was fundamentally corrupt, featuring special favors for the well-heeled. I don’t like it when lower-income people use the political system to take money from upper-income people, but it is downright nauseating and disgusting when upper-income people use the coercive power of government to steal money from lower-income people.
Now, to add insult to injury, we’re being fed an unsavory gruel of deception as the political class tries to cover its tracks. Here’s a story from Bloomberg about the Treasury Department’s refusal to obey the law and comply with a FOIA request. A Bloomberg reporter wanted to know about an insider deal to put taxpayers on the line to guarantee a bunch of Citigroup-held securities, but the government thinks that people don’t have a right to know how their money is being funneled to politically-powerful and well-connected insiders.
The late Bloomberg News reporter Mark Pittman asked the U.S. Treasury in January 2009 to identify $301 billion of securities owned by Citigroup Inc. that the government had agreed to guarantee. He made the request on the grounds that taxpayers ought to know how their money was being used. More than 20 months later, after saying at least five times that a response was imminent, Treasury officials responded with 560 pages of printed-out e-mails — none of which Pittman requested. They were so heavily redacted that most of what’s left are everyday messages such as “Did you just try to call me?” and “Monday will be a busy day!” None of the documents answers Pittman’s request for “records sufficient to show the names of the relevant securities” or the dates and terms of the guarantees.
Here’s another reprehensible example. The Treasury Department, for all intents and purposes, prevaricated when it recently claimed that the AIG bailout would cost “only” $5 billion. This has triggered some pushback from Capitol Hill GOPers, as reported by the New York Times, but it is highly unlikely that anyone will suffer any consequences for this deception. To paraphrase Glenn Reynolds, “laws, honesty, and integrity, like taxes, are for the little people.”
The United States Treasury concealed $40 billion in likely taxpayer losses on the bailout of the American International Group earlier this month, when it abandoned its usual method for valuing investments, according to a report by the special inspector general for the Troubled Asset Relief Program. …“The American people have a right for full and complete disclosure about their investment in A.I.G.,” Mr. Barofsky said, “and the U.S. government has an obligation, when they’re describing potential losses, to give complete information.” …“If a private company filed information with the government that was just as misleading and disingenuous as what Treasury has done here, you’d better believe there would be calls for an investigation from the S.E.C. and others,” said Representative Darrell Issa, the senior Republican on the House Committee on Oversight and Government Reform. He called the Treasury’s October report on A.I.G. “blatant manipulation.” Senator Charles E. Grassley of Iowa, the senior Republican on the Finance Committee, said he thought “administration officials are trying so hard to put a positive spin on program losses that they played fast and loose with the numbers.” He said it reminded him of “misleading” claims that General Motors had paid back its rescue loans with interest ahead of schedule.
P.S. Allow me to preempt some emails from people who will argue that TARP was a necessary evil. Even for those who think the financial system had to be recapitalized, there was no need to bail out specific companies. The government could have taken the approach used during the S&L bailout about 20 years ago, which was to shut down the insolvent institutions. Depositors were bailed out, often by using taxpayer money to bribe a solvent institution to take over the failed savings & loan, but management and shareholders were wiped out, thus preventing at least one form of moral hazard.
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