Memo to Obama: Stop Playing the Economic Shell Game

Common stock in the bailed out banks will do nothing to help the real issues facing the American economy

from Pajamas Media
April 29, 2009
by Martha Zoller

If you lent someone money and that person offered to pay you back early and with interest, you’d take it, right? Not the Feds. They don’t want to take back your money, they want to lend you more. The Feds don’t have much common sense when it comes to the mood of the country. They don’t get it. We are waiting for the other shoe to drop.

Last Tuesday, David Kellerman, the acting CFO for Freddie Mac committed suicide. I had a flashback for a moment to early in the Clinton administration when White House Counsel Vince Foster committed suicide. What was so horrible, what piece of information so controversial, that it led men with so much to offer to think the world was better off without them? We may never know.

In the banking world, many have discovered it isn’t nice to have a partner the size of the Federal government. In fact, many of the banks didn’t want to take TARP money but the government – and particularly former Treasury Secretary Henry Paulson — didn’t want consumers to know which banks were in trouble, so they strong-armed the other banks into taking money they didn’t need. Right now, some of those banks want to pay back the money — our money — and the Feds don’t want to take it. This is a typical government practice but counter-intuitive to basic business principles.

There is about $110 billion dollars left in the TARP fund. The problem is there’s very little evidence that this program is working. While some banks are showing profits, many think the numbers are just being moved around to reflect a profit, the progress is all smoke and mirrors, and it won’t last. Now President Barack Obama’s economic team thinks it can avoid asking for more money from Congress if it converts loans made to banks to common stock. Having the Federal government as the major stockholder in the nation’s banks scares me and it should scare you. The government as shareholder means the Feds can determine hiring, salaries, and a whole host of other issues. Many of us like the idea of the government controlling corporate executive’s salaries, but what about when they cap everyone’s salaries?

Instead of President Obama’s clearly stupid move of trying to cut $100 million dollars from the budget at the first full cabinet meeting last week, maybe he and and his economic team could return the remaining $110 billion dollars from TARP fund to the treasury and let the banks repay the other TARP funds when they are ready and get the government out of the way.

In fairness, some economists justify the effort to convince the stakeholders to convert preferred stock to common stock as part of the plan to improve the nation’s largest banks. The much talked about stress tests for banks are expected this week and according to some, such a conversion would give the banks more stability. While I am not an economist, I know what the free market is and this is not the free market. The free market is the best way to lift people out of poverty. It created the middle class in America and it’s what makes the American economy the most important economy in the world — even now.

The bailouts were supposed to loan the capital to the institutions with the purpose of paying the funds back with interest so that the taxpayers got more for their money. But government arbiters think there is an endless supply of taxpayer money. When several banks said they were ready to pay back the TARP funds loaned to them with interest, the Obama economic team said no. So the goal appears to have changed and we weren’t told about it. We cannot allow this to go on. It is our money to be spent on a limited number of things.

David Walker, former U.S. comptroller general and president of the Peter G Peterson Foundation (pgpf.org) has for years been preaching the message of fiscal responsibility — in government and out. According to Walker, less than 40% of the money appropriated every year by Congress is based on guidelines set out in the Constitution. That leaves roughly 60% a year that is potentially being overspent. Let’s start streamlining government. There’s work to be done to save this economy and this Republic. Don’t spend any more money on the banks. Put a commission together to recommend solutions to the spending problems relating to entitlements. Don’t allow the Bush Tax Cuts to expire, and stop taxing people’s assets after they die. Return the individual more of his or her money to spend as he or she wishes. Unleash American exceptionalism.

Common stock in the bailed out banks will do nothing to help the real issues facing the American economy. Let the banks fall if they aren’t profitable. The longer we put off the inevitable with this economic shell game, the longer it will take for the economy to bounce back.
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