I have a piece on the home page today on the Democrats’ plan to use TARP funds to pay for a new stimulus package. One thing that struck me as an especially bad idea was Obama’s proposal to use TARP to expand the Small Business Administration:
Small businesses do need capital, but this is not the right way to provide it. The SBA has a dismal track record littered with countless examples of fraud and abuse. A devastating 2006 report by the agency’s inspector general found that about $130 million in loans approved between 2000 and 2005 “were not properly reviewed by SBA.” Like Fannie and Freddie, the SBA has its primary incentive to grow its own portfolio, which puts downward pressure on its underwriting standards. Just last month, another report, this time from the Government Accountability Office, warned that the SBA’s risk-rating system was inadequate. Taxpayers are already exposed to over $90 billion in loans guaranteed by the SBA, and Obama’s plan could double or triple that, depending on how much of the $200 billion in projected TARP “savings” he decides to funnel through the agency.
Sen. Judd Gregg and his staff have been on top of this issue since Pelosi first floated this Joker-from-Batman-style poison trial balloon, so I called him up and asked him whether he thought this would even be legal. Gregg says that if the administration used TARP money to set up a new program through the SBA without any legislative changes to the program, then “we’d have a real problem.”
“I think that’s outside of TARP, in my opinion,” Gregg says. “TARP was pretty well-defined for the purposes of stabilizing the financial sector in face of systemic risk. What they’re doing here is just a political shell game to put the cover of TARP on the issue of spending money on a new stimulus package.”
Gregg says that Congress would have to change the law in order to redirect money authorized for TARP toward stimulus projects. Either way, it’s still borrowed money.
“They’re talking about money that was authorized but never drawn down,” Gregg says. The administration has implied that the new stimulus bill would be funded from early repayments of TARP funds, but Gregg says that would be against the law. “The money that’s come back into TARP is not in my opinion available at all. By law, it has to be held in a special account for purposes of a later financial event, or it has to go to debt reductions.”
Amending the TARP law to allow part of the $700 billion to be spent on stimulus projects would be the same as authorizing new spending. The only reason the Democrats are invoking TARP at all, Gregg says, is that, “They would rather say it’s TARP money than say it’s money that will have to be borrowed from China and paid down by our kids.”
Gregg says he can’t believe that the Democrats think of that $700 billion as money that’s available to spend. “When TARP was created,” he says, “the way that number was arrived at was that Hank Paulson wanted a number that was so large that the world would conclude that the U.S. would stand behind the financial sector no matter what. But no one thought we would use all that money, and we haven’t had to.” The Treasury has only loaned out $364 billion of the $700 billion, and Geithner claims that he expects all but $42 billion of that to be repaid.
“The whole TARP program should be terminated now,” Gregg says, “but if it is going to stay in place, those dollars should be used to pay down the deficit.”
Update: I’ll be talking about this issue on the David Boze show at around 6:10 p.m. EST. Interested readers can listen live by following the link on this page.