Out of Control Policy Blog

TARP Jr. a Wave of Contradictions

Rep. Frank introduced a bill in the House last month, now has 20 additional sponsors, that would give Treasury authority to begin investing in small banks and businesses around the country. The Small Business Lending Fund Program—or TARP Jr. as some are calling it—would "direct the Secretary of the Treasury to make capital investments in eligible institutions in order to increase the availability of credit for small businesses, and for other purposes." The fund would allocate $30 billion for Treasury to invest in institutions that had less than $10 billion in assets. Local banks would receive funds under conditions requiring them to lend to certain businesses. The goal is to increase bank capacity to lend, since credit is still tight across America.

While the White House and Congress have accurately identified the credit crunch as damaging to the economy, their response is a wave of contradictions.

  1. Liquidity is not the only problem. Confidence is a huge factor too. To begin with, there are 91 banks that have just missed TARP repayments. These banks are struggling, and it is understandable that they wouldn't be lending. But other banks, many of which have repaid their TARP funds or have been able to survive without a government bailout, aren't lending for at least one macro reason: with a range of regulatory changes coming, many banks are waiting for the new operational limits. Some local banks may also be withholding credit because there is a lack of viable investment opportunities. The mindset of Americas—for businesses and citizens—needs to change: the high flying credit days of the first part of this century aren't sustainable, and we shouldn't be waiting until credit starts flowing like water again. So we have a spending program that isn't going to fix the real problem.
  2. More spending? The President and Congress have acknowledged that deficits are a problem. We are on an unsustainable debt path. So why do spending programs continue to stream out of Capitol Hill. From the proposed $140 billion jobs bill that was voted down on Wednesday in the Senate, to this TARP Jr. bill that would spend $33 billion (including separate funds for states to invest through their own programs). We can't spend our way out of a recession. If a business can not get off the ground without the help of the federal government, then it is probably not a good business model. While credit is tight, there are investors out there, looking for yield in a rough economy. And the good ideas will get funded. So we have a spending program that contradicts the White House concerns about debt.
  3. Double talk from the administration. Geithner has said repeatedly that the U.S. government shouldn't have to bailout banks or businesses. He has even said it is unfair. The President has said he doesn't want to run a car company or other businesses. So why do these men continue to support policies that would have them do what they say the government shouldn't do? We have here a spending program that contradicts the supposed beliefs of the administration.
  4. Basic principles of economics are clear: the government does a bad job at picking winners and losers in the market place. How does the government know what businesses are good to invest in? Do they have the right incentives to maximise the use of taxpayer funds? Historically, we know the answer is no. So we have a spending program that contradicts what we know of effective government.

This bill would be a terrible waste and just more dirt flung out of a hole we're struggling to fill back in.

Anthony Randazzo is Director of Economic Research


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