How the GOP Should Approach TARP 2.0
Obama is not instinctively wary of government
FEBRUARY 23, 2009
By ED GILLESPIE
As the administration of George W. Bush was developing the $700 billion Troubled Asset Relief Program (TARP) last fall, the perils of moral hazard and government control over our nation's financial sector were well understood.
Like the president himself, I was loath to see a massive government intervention in the financial markets. But I also heard the president's top economic advisers tell him that a failure to act decisively could plunge us into another Great Depression.
As the world awaits the details of the Obama administration's version of TARP, two things have changed since last fall: First, we're not facing the same massive, day-to-day market volatility and frozen credit markets that were the context of the original TARP decision. Second, our new president doesn't have the same instinctual resistance to government intervention as his predecessor. Consequently, the next iteration of TARP is likely to be much more far-reaching. Democrats appear poised to impose many intrusive conditions on our financial institutions.
This will present Republicans in Congress with a far more difficult debate than they faced with the stimulus package earlier this month. Republicans benefited in the stimulus debate from offering an alternative approach to creating jobs, with a focus on lower taxes for small business owners, and from ridiculing outrageous pork-barrel spending. Critiquing an expanded TARP and providing a positive alternative will pose a much greater challenge.
An early indicator can be found in the stimulus bill just passed, which included limits on executive compensation that are much more stringent and broadly applied than anything even Mr. Obama put forward. These provisions are so heavy-handed they are likely to have perverse effects in the marketplace, driving away the talented traders necessary to restore TARP-funded firms to prosperity and eventually repay the federal government. In fact, the conditions might even drive talent from American firms to foreign firms not eligible for TARP money.
Unfortunately, Republicans will realize that there's not much political gain to be had opposing legislation over stringent executive compensation limits.
And that may only be the beginning. You can just hear House Financial Services Committee Chairman Barney Frank (who is currently under investigation for tax fraud) chastising financial companies for the scarcity of women in their executive ranks: Surely these firms can improve the gender balance by five percentage points over the next three years? And to help encourage them to meet that goal, maybe these firms should be penalized a premium on the interest due on their TARP funds if they don't.
Nor is it difficult to imagine the Senate Banking Chairman Chris Dodd (with his V.I.P. loan problems) bemoaning the lack of alternative-fuel vehicles in a TARP recipient's fleet. A mandate to purchase more environmentally friendly cars would not only help stem climate change, he might say, but would help auto companies meet the strangling requirements imposed by the California emissions standard the Obama administration appears poised to let go into effect.
The grave threat of the next TARP is that it will set in motion a downward spiral, beginning with government-imposed conditions diminishing corporate profitability, which in turn could necessitate another injection of taxpayer money, along with further government conditions. This, on top of the vast sums of nonstimulative spending just enacted, will be a drag on economic growth. It's a slippery slope that Republicans must oppose from the outset.
If unable to stop this threat, Republicans can work toward two goals. First, add workable provisions that allow financial institutions benefiting from TARP funds to work themselves off the government's ledgers -- and out from under any political conditions imposed on them over Republican objections.
Second, we need to insist that any conditions imposed on financial institutions are limited to only those companies benefiting from TARP funds.
The original rationale for TARP was to prevent the giant oaks of America's financial forest from bursting aflame and burning the whole forest to the ground. Now the Obama administration and its Capitol Hill allies appear set to impose conditions that will amount to a deadly infestation that kills those oaks slowly over time. Republicans need to fight for the restraint that will allow healthy new trees to sprout through the decay of those dead oaks.
Mr. Gillespie served as counselor to President George W. Bush and was chairman of the Republican National Committee from 2003-2004.
online.wsj.com |
