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Regrets?
TARP, reconsidered.


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Now that we’re deep in a culture of bailout and face an Obama-Reid-Pelosi Washington, National Review Online gave a few conservative supporters of the original Paulson plan an opportunity to reflect and, perhaps, reconsider. Specifically, we asked: Was the Troubled Assets Relief Program a mistake? Here’s some current thinking.

LARRY KUDLOW

The TARP plan that debuted in October was described as a way to purchase toxic assets from banks and other lenders in order to unclog the credit system, which is so essential to the efficient functioning of the economy. I supported that plan then, and I still do now.

Unfortunately, the plan has changed, and I feel as though the rug has been pulled out from under me. The shift to investing in various banks and other financial companies is troubling. So far, the Treasury has injected $244 billion of taxpayer capital into 150 companies. There have been no auctions for toxic assets. And now TARP may be used to bail out General Motors.

Where will it end? A recent news story talked about car-rental, ethanol, and equipment-leasing companies asking for TARP funds. After GM, maybe car suppliers and dealers will want TARP. It’s not hard to envision a long queue in front of the Treasury Department made up of various U.S. businesses hoping to get bailed out.

Once you stuff money into the banks, you create a political argument for stuffing money everywhere else. And now I worry that we have entered a period of unprecedented government intervention in the economy. It’s industrial policy on a grand scale; it’s picking winners and losers.

Another story talks about all these new czars in the White House — an energy czar, an urban-affairs czar, a health czar. Paul Volcker and Larry Summers already are economic czars. And a car czar may be announced this week. But all these czars remind me of the Soviet Union, not our great democracy here in the United States. A potential $1 trillion stimulus plan that relies almost solely on government spending is part of the new-New Deal economic-policy disease.

I don’t know how all this will get unwound. TARP has become much greater than I ever believed possible–technically, financially, and symbolically.

Color me very worried.

Larry Kudlow, NRO’s Economics Editor, is host of CNBC’s Kudlow & Company and author of the daily web blog, Kudlow’s Money Politic$.

DONALD LUSKIN
I supported TARP when it was being debated in September, and I still do — all the more so, since it has been transformed primarily into a mechanism for recapitalizing banks (temporarily) rather than buying illiquid assets (permanently). As a conservative and a libertarian, I am repelled by government intervention like this. But we don’t have the luxury to stand on principle. The reality is that our government holds itself out as a safety net for the banking system, and it is obliged to effectively act as such when needed. Especially after the series of disastrous interventions from mid-March to mid-September, from Bear Stearns to Wachovia, in which government ineptitude nearly destroyed the financial system (documented in my November 17 NR cover story “Deadly Rescues“), it is the duty of the Treasury, the Fed, and the FDIC to not only do what they are chartered to do, but to clean up after their own mess. Yes, there will be challenges ahead in weaning ourselves from the TARP teat. But if it had not been for the government involvement of TARP, I have no doubt that the lights of the world would have gone out by now — and they’d be very difficult to relight, and government would only be even more involved.

Donald Luskin is chief investment officer of Trend Macrolytics LLC, an independent economics and investment-research firm. He invites you to visit his blog and welcomes your comments at [email protected].

JIM MANZI
The bailout appears likely to have helped stave off the immediate emergency we faced less than three months ago. It is very unclear how relatively fragile the credit situation is today versus September and October. While interest-rate spreads have declined, it may be that Treasury knows of or suspects specific hidden weaknesses like credit-default swaps that might put us right back to four-alarm-fire mode any moment. The endless stream of huge bailout requests has come on more quickly than I expected, and appears to be contributing significantly to the momentum behind incredible spending plans, especially stimulus plans, by the new administration. The equity-injection approach that has been used to date runs the risk of avoiding the necessary restructuring and financial pain that will be required to get the financial sector healthy again; and there is at least anecdotal evidence that we may be developing exactly such a zombie-bank problem right now. In sum, the bailout so far has been painful, expensive, and sloppy, but we’re still in one piece.

Congress has the right to approve or deny any request that Treasury might make for the second tranche of the additional $350 billion. This should be treated as a separate request. We have the luxury of time, as compared to a few months ago, to vet this request with far greater rigor, and in light of what we have learned. Specifically, before authorizing this money, Congress should perform its oversight function, and demand to know: (1) What underlying risks, not to shareholders or employees, but of systemic financial collapse, now exist or are latent that would justify this much money? And (2) How we will avoid the zombie-bank problem, including potential application of lending requirements in return for capital, as has been done in the U.K.?

I supported the original bank bailout, and continue to believe that it was a painful, but correct, decision. However, supporting the next tranche will require a lot of convincing.

Jim Manzi is the CEO of an applied-artificial-intelligence software company.

ANDREW STUTTAFORD
This crisis has been slouching in our direction for quite some time, but if you had to identify the moment when it was transformed into a panic (with a destructive momentum all its own) it was the Lehman collapse. That event shattered what was left of the financial system’s most valuable asset — its credibility. TARP was the hastily and imperfectly improvised response. While it was not originally structured in the way that I would have preferred (direct equity investment in the banks), it was better than anything else on offer and I was a supporter. The alternative, doing nothing, might have been intellectually satisfying for some market fundamentalists, but it threatened leaving a wasteland in its wake. Some experiments are too dangerous to try.

It’s important to recognize that the rationale for TARP (in the form into which it eventually evolved) was very specific. The cash injection by the government (more accurately, the taxpayer) was designed to restore a reasonable degree of confidence about, and, almost as important, within the banks. By reducing the rationale for their more extreme risk aversion, it should in time mean that lending can resume its usual cyclical rhythms, something that is an essential precondition of any eventual recovery. The implementation of all this has certainly proved uneven, but two months or so into the program, some good progress has clearly been made. As to whether TARP should now be extended to include the auto companies, that’s an entirely different discussion . . .

Andrew Stuttaford is a contributing editor of National Review Online.



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