The Campaign Spot

What Problem Was the Stimulus Aimed to Solve?

Our old friend David Frum was just on MSNBC’s morning show, and he articulated something that had been brewing in the back of my head for a while.

Back when Congress was considering the first part of the TARP, we were told Congress had to authorize $750 billion in bailouts or else we would face economic collapse. (We may have gotten one anyway; as recently as early September, the Dow was above 11,500.) The plan was, the government would buy the derivatives based on subprime loans, the banks would write off the losses, and the banks would be healthier because the troubled assets would be off their books. There was a great deal of debate, and much opposition, but it ultimately passed.

And then, the plan changed:

“As the markets deteriorated and as you looked at what was happening in this country and globally and looked at how frozen the markets were, it was clear that we needed to use a different tool, an additional tool,” Paulson said in an interview yesterday.

Paulson and his colleagues turned their attention to a different approach: making investments in banks. That strategy, which many independent economists had preferred, was also authorized under the new law. Federal Reserve Chairman Ben S. Bernanke had privately urged that approach for weeks, but he vigorously endorsed Paulson’s rescue package in part because he knew it left Paulson enough flexibility to change direction.

The government didn’t buy bad assets from the banks; it bought stock in the banks instead.

We were told that those toxic assets were the — pick your metaphor, toxin, virus, cancer — that was making banks afraid to loan and drying up the credit markets, and that this, coupled with the bursting of the housing bubble, was dragging down the economy. But instead of getting those assets out, putting cash in was the better move, we were told.

Obama took office with the economy still falling — remember, the Dow dropped about 1,700 points between Election Day and Inauguration Day — and the plan was . . .

. . . spend a whole lot, on all sorts of projects. Some of it is worthwhile, some of it is a little shakier — $2 billion for a clean-coal power plant with specifications matching one requested by Blagojevich, $300 million for golf carts built in North Dakota,  $255 million for a polar icebreaker, $50 million for the National Endowment for the Arts, etc.

Frum compared this to the Clinton administration’s taking on the wrong issue in 1993. Then, congressional Democrats were okay with tax hikes and “stimulus” spending, but slow to take on welfare reform. This year, the Obama administration may have been quick to increase federal spending, but way too slow to address the real issue of banks and the value of the assets they have.


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