The Fallacy of TARP Profits

Originally posted at FreedomWorks.org.

Recently, the Obama administration has been touting that the Troubled Asset Relief Program or TARP—the massive $700 billion Wall Street Bailout—“saved” the economy and actually returned an 8.2 percent “profit”.  Today, the New York Times reported that:

This case was strengthened by the news that the bailout might actually end up costing the taxpayer less than $50 billion over all, rather than the $700 billion originally set aside to pay for it…As it stands, the federal government may actually end up turning a modest profit on the money injected into Wall Street’s failing banks.

So TARP was a great success, right? No, of course not. As we’ve said from the beginning, TARP was a mistake that would likely do far more harm than good.  Before TARP was signed into law, FreedomWorks President Matt Kibbe wrote in Reason Magazine:

My biggest fear is that the plan will do far more harm than good, even in the short run, by propping up poorly performing banks at the expense of well-run institutions ready and able to come in and clean up the mess. And, yes, as Warren Buffet could tell you, they hope to make a healthy profit doing it.

During fall 2008, FreedomWorks was part of a surprisingly small group of principled free market groups who opposed the government bailout. Andrew Moylan of the National Taxpayers Union (NTU) was one of the few who joined us in speaking out against TARP from the start. In NTU’s blog, he explains the myth of the TARP’s “profit”:

The banks that got bailed out through TARP shuffled all of their bad assets over to Fannie Mae and Freddie Mac, which got their own separate bailout.  So, really, it should be no surprise that they’re relatively healthy.  They cut out the cancer and passed it right along to Fannie and Freddie.  The banks have issues with the current foreclosure mess, but the worst loans are no longer their problem, they’re taxpayers’ problem.

As Moylan points out, Fannie and Freddie–which is to say the taxpayers–bought up most of the toxic assets from bailed out banks. Moreover, the pro-TARP Obama administration is attempting to hide the real cost of the TARP bailout. To date, Fannie Mae and Freddie Mac have put taxpayers on the hook for $135 billion.

According to a new report released by the Federal Housing Finance Agency, the cost of bailing out Fannie and Freddie could nearly double. The cost of Fannie and Freddie will depend on the state of the economy. The government backed mortgage giants could end up costing taxpayers an additional $124 billion if the economy worsens.

In the end, we were right. The entire Wall Street bailout has cost taxpayers billions while not improving the economy in the slightest. It surely has not improved the housing market or the job market—the unemployment rate stands at a high 9.6 percent. In fact, a Congressional Oversight Panel report says that “there is very little evidence to suggest that (TARP) led small banks to increase lending.”

Just as we expected, TARP exacerbated the moral hazard problem.  If banks know they will be bailed out, they have more incentives to engage in high-risk and high-reward positions. If they succeed, they are rewarded by the market. If they fail, they are rewarded by the government through taxpayers. It’s a win-win scenario.

Even Neil Barofsky, who is in charge of overseeing TARP,  noted in his quarterly report to Congress that banks were not held accountable for their actions. He stated:

The firms that were ‘too big to fail’ last October are in many cases bigger still, many as a result of Government-supported and -sponsored mergers and acquisitions…TARP runs the risk of merely re-animating markets that had collapsed under the weight of reckless behavior.

President George W. Bush who signed TARP into law foolishly stated “I’ve abandoned free-market principles to save the free-market system.” However, the severe financial crisis was created by government intervention in the market in the first place. Instead, the solution is to allow the true free market to get us out of this mess. Let the failure of TARP be a lesson to all: government bailouts have negative consequences. Regardless of the circumstance, we must stay true to free market principles that promote freedom and prosperity.

Supreme Court to Hear Arizona School Choice Case

Originally posted at FreedomWorks.org.

On November 3, the U.S. Supreme Court is scheduled to hear oral arguments in a case over Arizona’s popular school choice program. Arizona’s well-known 13 year old Individual Scholarship Tax Credit program offers tax credits to those who donate to fund scholarships for students to attend a private school. Unfortunately, the American Civil Liberties Union of Arizona filed a lawsuit claiming that the program was unconstitutional since many children have voluntarily chosen to attend religious private schools.

For many years, school choice programs have been under attack from powerful teachers unions, some politicians and others. However, the ACLU who claims to protect individual rights should be a main supporter of school choice. These programs allow students to escape their local failing school to attend a better school that meets their individual needs. As a result, parents and students have a wide array of nonreligious and religious schools to choose from.

Under Arizona’s school choice program, residents who donate to any of the 54 school tuition organizations receive a tax credit. Last year, 73,000 residents donated $50 million to fund these scholarship programs. All residents have the option to donate to the many non-religious scholarship organizations. This scholarship tax credit program allows approximately 28,000 students to receive a better education. According to Tim Keller, executive director of Institute for Justice’s Arizona chapter,

Private choice, not government action, controls Arizona’s tax credit program. The entire program is religiously neutral.  Taxpayers and parents have no financial incentive to donate to either a religiously affiliated scholarship organization over a nonreligious scholarship organization or to select a religious over a nonreligious school.

The Supreme Court’s decision will have major implications for other school choice programs around the country. Many states have similar tax credit scholarship programs including Iowa, Georgia, Rhode Island and Pennsylvania. With the fight for school choice heating up in Pennsylvania, the ruling has the potential to hurt countless parents and students.

In a Goldwater Institute report, they found:

a significant number of Arizona families with incomes below $30,000 are benefiting from school choice policies.

In fact, 90 percent of the school tuition organizations reward scholarships based on financial need.  Additionally, Baylor University Economics Professor Charles North found that the scholarship tax credit program saves Arizona taxpayers somewhere from $99.8 to $241.5 million.

The 9th U.S. Circuit Court of Appeals ruled in favor of the ACLU claiming that the program was unconstitutional. If the Supreme Court upholds this decision, thousands of children would be forced to return to their local public schools. Dr. Charles North also finds that 11,697 students would have no choice but to return to their local public school without scholarship credit. However, the Center for Arizona Policy estimates that number to be much higher:

Since the committee found that approximately two-thirds of the scholarships are awarded to students from low-income families, it is extremely likely that more than one-fourth of the current students receiving scholarships would not be able to attend a private school without the scholarship, so the program results in savings to the State.

In an Institute for Justice video, the Dennard family whose five children receive an educational scholarship says:

We started to have a family and have children and when we did that their quality of education became a major issue. The public schools in south Phoenix are inadequate. Arizona’s scholarship program gave our family the opportunity, gave us a choice, they gave us the opportunity to choose the school that we want in our neighborhood…please don’t cut this program out. It has benefitted my family, my children have a great education, they are going on to college now.

The Arizona school choice program has been a win-win. It saves taxpayers money while increasing parental satisfaction and student achievement. While the Arizona scholarship program is still limited, the Goldwater Institute states that:

scholars have demonstrated… that school choice had led to academic gains at the school level, both in Arizona and elsewhere.

Since parents have a true private choice, the Supreme Court upheld the constitutionality of Ohio’s school choice program in Zelman v. Simmon-Harris in 2002. Let’s hope that the recently sworn in Supreme Court justices also understand that Arizona’s scholarship program has the secular purpose of allowing children the freedom to escape their local failing public school.

CEOs: Obama’s Policies Are Deterring Job Growth

Originally posted at Truth in Jobs.

The current economic downturn is far from over. For the past 14 consecutive months, the unemployment rate has remained above 9.5 percent. The new claims for unemployment insurance rose to a higher-than-expected 459,000 last week.

While every American has been affected by the recession, young people have been hit the hardest. The teenage unemployment rate remains the highest at 26 percent. For African American youths, nearly half of those actively searching for jobs are unemployed. This does not include the many teenagers that are willing to work but have given up searching for jobs. The MarketWatch graph below shows that youth employment has fallen in the past decade:

Individuals who begin working as teenagers are put at a considerable advantage. Studies have shown that people who do not start working as teenagers will ultimately suffer from longer periods of unemployment and lower wages in the future. Since many teenagers are struggling to find an entry-level job to gain experience and skills, some have referred to them as the “lost generation.”

So why have employers been so reluctant to hire new workers? According to some top CEOs, the Obama administration policies will punish them if they create a new job. If government raises the cost of businesses by imposing steep taxes and regulations, many companies have no choice but to lay off workers to stay in business.

Last month, Former White House Chief of Staff Rahm Emanuel asked a CEO of a large company:

“How come you guys aren’t hiring more?”

The CEO responded by saying:

“I know you’re paid to do the president’s bidding, but I’m paid to answer to shareholders and a board of directors and your health-care plan is costing me $1.5 billion, your tax increases another $1 billion, and regulation another half a billion. So I might have to lay off people rather than hire them.”

In the Wall Street Journal, one of the co-founders of Home Depot, Ken Langone, tells President Obama to “stop bashing business.” He states:

“If we tried to start Home Depot today, under the kind of onerous regulatory controls that you have advocated, it’s a stone cold certainty that our business would never get off the ground, much less thrive. Rules against providing stock options would have prevented us from incentivizing worthy employees in the start-up phase—never mind the incredibly high cost of regulatory compliance overall and mandatory health insurance.”

A recent poll showed that half of CEOs did not anticipate hiring any new employees in the next year. Businesses are uncertain whether or not they can afford to hire new employees with threats of massive change, like the cap and trade bill. With the largest tax hike in history in just 77 days, unemployment levels are expected to increase even further. To boost hiring, Congress should instead promote policies that cut taxes and regulations on job creators.

The Fed Printing More Money Will Make Things Worse

Originally posted at FreedomWorks.org.

Today, Chairman Ben Bernanke gave a big speech on the Federal Reserve’s next move in Boston. During his speech, Bernanke announced yet another round of “quantitative easing”. In plain English, this means that the Fed will fire up their pressing presses to create more money. This likely won’t end well.

The current economic crisis is far from over. Last Friday, the Labor Department reported that the unemployment rate remained at a high 9.6 percent in September. The number of new people filing for unemployment insurance rose to a higher-than-expected 462,000 last week. But the last thing we need is the Federal Reserve to “fix” things.

Hasn’t the Federal Reserve done us enough harm? Countless studies have confirmed that the Federal Reserve played a major role in the financial collapse by artificially keeping interest rates low and inflating the money supply in the economy. Inevitably, the long period of unsustainable negative real interest rates gave individuals a tempting incentive to borrow from the banking system. Unfortunately, the artificially low interest rates misled millions of people to take out loans that they could not afford to pay back once the interest rates eventually rose.

Even a Fed official recently admitted that the Fed played a role in the economic meltdown. According to the President of the Federal Reserve Bank of Kansas City, Thomas Hoenig:

Monetary policy is a useful tool, but it cannot solve every problem faced by the United States. In trying to use policy as a cure-all, we will repeat the cycle of severe recession and unemployment in a few short years by keeping rates too low for too long… I wish free money was really free and that there was a painless way to move from severe recession and high leverage to robust and sustainable economic growth, but there is no short cut.

As expected, government’s efforts to recover the economy have made the situation far worse. Cato Institute Scholar James Dorn states that:

No one at the Federal Reserve, Treasury or Council of Economic Advisors foresaw the crisis. When the crisis hit, the predictions were that unless the government dramatically increased its role in the economy, the U.S. would fall off a cliff. In reality, after billions in stimulus spending, unemployment is still unusually high, growth is sluggish, and uncertainty prevails.

We must change course. No matter what the Fed does, the economy will suffer for a period of time. However, the Fed must step back and finally allow the recession to run its course. It will be a costly and painful process but Fed action will only make the situation worse in the long-run.

Financial economist Peter Schiff who predicted the current recession to a T says that we haven’t seen anything yet. Schiff states:

Many now claim that government deficits and Fed easing prevented a repeat of the Great Depression. From my perspective, calamity was not averted but merely delayed. The price for the reprieve will be a far more severe downturn, which I now think will surpass the Great Depression.

In the end, the Federal Reserve printing more money will amplify our economic woes. Unless we change direction, the dollar will likely collapse, millions more will be out of their jobs and our standard of living will continue to plummet. In 2002, Ben Bernanke earned the nickname “Helicopter Ben” by stating that:

The US government has a technology, called a printing press, that allows it to produce as many US dollars as it wishes at essentially no cost.

He then referred to a statement by Milton Friedman claiming that the government could defeat deflation by dropping money out of a helicopter. It seems that Bernanke is warming up his helicopter to increase inflation by pumping more money into the economy. In order to experience a true lasting recovery, the Federal Reserve must stop tampering with the market and allow the free market to self-correct itself.

The Case against Proposed Chinese Tariffs

Originally posted at Young Americans for Liberty.

In the midst of “Fair” Trade Month, the House of Representations passed a misguided bill entitled Currency Reform for Fair Trade Act of 2010 by a vote of 348-79 last week. Supporters of the protectionist bill likely believe that China is manipulating its currency to artificially lower the price of Chinese goods imported in the United States. If approved by the Senate and President Obama, the law would allow the Obama administration to raise tariffs on Chinese imports. According to Heritage Foundation Fellow Derek Scissors, the value of Chinese currency has not significantly impacted the US economy:

The extent of the yuan’s misalignment is unclear, and so designing real remedies is almost impossible. More importantly, undervaluation is not a major factor in the bilateral deficit and not a factor at all in the overall trade deficit. And there is very little evidence that the yuan’s undervaluation costs the U.S. a large number of jobs. China is often a poor economic partner, but retaliation aimed at the exchange rate will not fix anything.

The fears surrounding the Chinese Yuan are largely unfounded. Since bilateral trade deficits are admittedly meaningless, a reduced deficit will not mean more American jobs. Dr. Scissors further states that:

Applying duties to Chinese goods would not suddenly make the American textile, toy, furniture, or even computer-assembly industries globally competitive, and these are the primary imports from the PRC. Globalization means the U.S can punish China, but it cannot simply turn Chinese losses into American gains.

During economic downturns, Americans are unfortunately more likely to become skeptical of free trade. Yesterday, the Wall Street Journal reports that 53 percent of Americans wrongly believe that free trade has hurt the US economy. This simply is not the case.

As philosopher George Santayana said “those who do not learn from history are doomed to repeat it.”  Similar to our current economic woes, the Great Depression was largely created by the Federal Reserve’s interference in the economy. Unfortunately, Congress wrongly blamed foreign trade for our past economic troubles by passing the misguided Smoot-Hawley Tariff Act of 1930.

It is believed that the protectionist Smoot-Hawley Tariff Act which raised U.S tariffs to record levels severely prolonged the Great Depression. Studies by economic professors Douglas Irwin, Mario Crucini and James Kahn found these tariffs directly reduced imports by 4 to 8 percent and decreased U.S GNP by 2 percent in the 1930’s. According to The Freeman, a publication by the Foundation for Economic Education:

In the 1990s Robert Archibald and David Feldman found that the politics of the Tariff generated tremendous business uncertainty. That uncertainty started in 1928 and grew worse throughout 1929 as the Tariff marched forward. Archibald and Feldman come as close as anyone has to linking the Smoot-Hawley Tariff specifically to the Great Crash.

In retaliation to the Smoot-Hawley’s punishing tariffs in the 1930’s, many of America’s trading partners ended up imposing high tariffs of their own against American goods. The New York Times even warns that China may also react in similar ways to current proposed tariff increases:

If Washington were to restrict trade with China — either by pushing the Chinese currency sharply higher or by imposing sanctions — it would only backfire. China could very well retaliate against American exporters, and buy goods from elsewhere (a worrisome development in what is now America’s third-largest export market). Or it could start to limit its purchase of Treasury securities.

Punishing China by raising U.S tariffs will likely do more harm than good. Ultimately, high tariffs will get passed on to American consumers in the form of higher prices for goods. If China retaliates by buying goods from elsewhere, American exporters will be hurt in the process. Instead, we should strive to have freer trade with all countries to promote innovation and freedom. As classical economist Adam Smith stated in the Wealth of Nations:

That trade which, without force or constraint, is naturally and regularly carried on between any two places is always advantageous.

If we want to live in a free nation, we must allow individuals to voluntarily trade their goods with whomever they desire which will also increase productivity and wealth.

Unemployment Likely Increased to 9.7 Percent in September

Originally posted at FreedomWorks.org.

On Friday, the Labor Department will release the last monthly jobs report before the midterm elections. Economists have already predicted that it won’t bring good news for the US economy. According to 62 economists surveyed by Bloomberg news,

Unemployment climbed to 9.7 percent from 9.6 percent in August…The data may also show companies added 77,000 workers to payrolls, and total hiring stagnated.

If their predictions are accurate, this will be the longest span of elevated joblessness since monthly records began in 1948. Recently, the National Bureau of Economic Recovery (NBER) announced that the numbers show that the recession was over in June 2009:

In determining that a trough occurred in June 2009, the committee did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity. Rather, the committee determined only that the recession ended and a recovery began in that month.

However, the mild “recovery” last summer only occurred since the federal government artificially increased GDP by moving borrowed money into those quarters. As we’ve seen, it was impossible to sustain the “recovery” since money was borrowed from another place and time. Sooner or later, the artificial GDP growth had to subside.

Northwestern University economic professor and NBER committee chairman Robert J. Gordon states that:

the amount of unemployment we’ve already got and the slowness of recovery lead to predictions that we could have 9-plus percent unemployment even through the next presidential election.

Since June 2009, the economy has lost more jobs than it has gained. A New York Times chart shows that job growth has stagnated in the past 15 months:

Furthermore, NBER committee chairman Robert J. Gordon says that:

what’s really unique about this recession is the amount of unemployment in combination with the slowness of the recovery. That’s just not happened before. We had a sharp recession followed by a sharp recovery in the 1980s.

In the 1980’s, the economy quickly recovered due to President Reagan’s plan which cut taxes by 25 percent over three years. In the midst of the recession, Reagan stated in 1981:

This is the time for a new beginning. I ask you now to put aside any feelings of frustration or helplessness about our political institutions and join me in this dramatic but responsible plan to reduce the enormous burden of federal taxation on you and your family.

The Washington Times chart below shows the economic recovery directly related to these tax cuts:

As shown in the chart, the Reagan tax cuts boosted GDP and job growth for many years to come. It’s no wonder that the economy has yet to have a lasting recovery from the current recession. To the contrary, the Obama administration plans to do the opposite by significantly raising taxes on families and small businesses on January 1st. The uncertainty over the looming tax hikes has affected businesses decision to hire new employees. The highly-anticipated September jobs report is likely to be even more proof that Obama’s “stimulus” packages cannot bring sustainable economy recovery.

Responsible Banks and Small Businesses Reject Mini-TARP

Originally posted at FreedomWorks.org.

On Monday, President Obama signed the Small Business Bill also known as mini-TARP into law. At the signing, he declared that the law was “a great victory for America’s entrepreneurs.” The centerpiece of the law will pump $30 billion taxpayer dollars into smaller banks in hopes that they will lend out more to small businesses.

However, small banks that have responsibly handled their money do not want or need these mini-TARP funds. In the end, mini-TARP is unlikely to spur lending to small businesses. William Chase, CEO of Triumph Bank in Memphis states that “we have taken a strategic decision not to have our primary regulator, the government, also be a partner in our bank.”

As part of the plan, the US Treasury will buy stock in the small banks that receive taxpayer funds. Consequently, banks will be forced to pay an annual dividend of 5 percent to the federal government. As Larry Kudlow states in Real Clear Markets, “Who in their right mind would sign up for this? This is government-planning intervention almost beyond belief.”

It is believed that mini-TARP will be rejected by a majority of small banks that do not want to be burdened by excessive government regulation. In fact, the Congressional Oversight Panel found that 690 small banks that were bailed out by the original $700 billion TARP funds are actually worse off.

Simply, the original TARP failed to meet its intended goals. The Congressional Oversight Panel report says that “there is very little evidence to suggest that the (bailouts) led small banks to increase lending.”

The biggest problem is not that banks are unwilling to loan to small businesses. A poll by the National Federation of Independent Business found that 91 percentof small business owners say all of their credit needs are met. Instead, the harsh economy has discouraged small business owners from seeking loans.

Noah Wilcox, CEO of Grand Rapids State Bank says that he has plenty of money to loan to small businesses. However, “many of our clients, business owners, put their projects on ice in 2008 because their job number one is to see their company through to the other side of this economic crisis.” Despite wrongfulclaims that the recession is supposedly over, the economy is likely to get muchworse in 2011.

With the largest tax hike in history only 93 days away, most small businesses are reluctant to expand their operation. The minor tax cuts present in the mini-TARP law will not likely make a significant impact to restore business certainty. The best way to increase the number of small businesses that seek loans is to permanently extend the major Bush-era tax cuts to all Americans and end the dramatic uncertainly created by constant threats of massive change, like the cap and trade bill.

In the end, mini-TARP will not spur lending to small businesses. Responsible banks and small businesses refuse to take part in a misguided program that will only increase their compliance costs. All banks should face the full consequences of their actions. Taxpayers should not be forced to bail out any banks that have engaged in risky behavior with their money. Instead, the federal government should step back and allow the market to correct itself instead of imposing regulations that harm taxpayers and small businesses.