Some of the nation’s top economists have warned Congress that the second round of $350 billion TARP money is not guaranteed to work as the law is written now.
Granting the Obama administration the second $350 billion of Wall Street bailout funding does nothing to ensure that the money is spent wisely, some of the nation’s top economists told Senate lawmakers Thursday. Without stricter conditions on banks and concrete assurance that the money will target foreclosure mitigation, the experts warned, the Troubled Assets Relief Program (TARP) will do little to revive the ailing economy.
“It’s a never-ending sinkhole of taxpayer money into major financial institutions without [attaching] some major strings,” Allen Sinai, chief global economist at Decision Economics, a private consulting firm, told lawmakers on the Senate Budget Committee Thursday. “[TARP] is the status quo,” he added later. “I wouldn’t support that.”
Sinai’s comments came just hours before the Senate voted to release the second half of the $700 billion Wall Street bailout with virtually no restriction on how it’s spent. The count was 52 to 42, with five Republicans supporting the release and eight Democrats, along with Independent Sen. Bernie Sanders (Vt.), opposing it.
Because only one chamber’s approval was required to release the funding, Senate passage means that President-elect Barack Obama will have access to the money shortly after he takes office next week.
The vote is also indication that Senate Democrats — who have assailed the Bush administration for what they consider its mishandling of the vaguely worded TARP bill — are ready to trust Obama and his economic team to manage the same legislation with better effect.
Sen. Mark Udall (D-Colo.), who voted against TARP as a House member last year, said he supported the release of the second $350 billion “because I am confident that President-elect Obama will use the money in a way that will stabilize our financial system and strengthen our economy.”
House Democrats weren’t in such a trusting mood. This week party leaders debated legislation to restrict Obama’s bailout spending. Sponsored by Rep. Barney Frank (D-Mass.), who chairs the House Financial Services Committee, the proposal would rein in executive compensation and shareholder dividends under TARP; direct at least $40 billion toward foreclosure mitigation; and force the bailed-out banks to detail their spending plans. House Democratic leaders said the bill would place important checks on how the White House will administer TARP spending.
“Perhaps we assumed too much, in terms of common sense, with the first TARP,” House Speaker Nancy Pelosi (D-Calif.) told reporters Thursday. “This will assume nothing, as we go forward.”
The Senate, however, has no plans to take up the Frank bill — or anything similar. Instead, Democratic leaders in the upper chamber are ready to take Obama’s economic team at its word.
They’ve had plenty of opportunity to absorb the message. The Obama team has repeatedly tried to assure Congress that the bailout dollars will be used responsibly. On Tuesday, Obama met with Democrats at the Capitol to address their concerns about releasing the TARP funds. And yesterday, Larry Summers, Obama’s top economic advisor, penned a letter to congressional leaders vowing that “our actions will reflect the act’s original purpose of preventing systematic consequences in the financial and housing markets.” The administration, Summers added, “has no intention of using any funds to implement an industrial policy.”
Still, Bush administration officials had made similar vows in urging Congress to pass TARP last year. And neither Summers’ letters nor Obama’s public statements are binding. Many economists, lawmakers and consumer groups contend the House was on the right track in trying to put some spending restrictions into law.
Douglas Holtz-Eakin, former head of the Congressional Budget Office, said that, given TARP’s lack of specificity, Congress should wring more details from Obama’s team about their spending plans. “I would force the new secretary of the Treasury to appear before Congress,” said Holtz-Eakin, who served as Sen. John McCain’s top economic adviser during the 2008 presidential campaign, “and explain with precision how those funds will be used rather than [granting] broad, ambiguous authorities that have been stretched through time.”
Sinai agreed, arguing that TARP is fundamentally flawed. “It wasn’t directed at the problem,” he said. “Housing is the problem.” He suggested that Congress withhold the funds until Congress learns “exactly what they plan to do with them — the kind of thing that didn’t happen the first time that Congress was shot-gunned into supporting this program.”
The Bush administration has used the first $350 billion to invest directly in troubled banks, but the effort has done little to thaw frozen credit markets and get banks lending again.
Sinai said that, under the current TARP bill, the lack of bank lending should come as no surprise. “It is not in their interest,” Sinai said of the banks, “to make a loan to a small businessperson if their survival is at stake … They simply won’t do it.”
Appearing before the Senate panel Thursday, Richard Berner, co-head of global economics at Morgan Stanley, said the banks are waiting for Washington to cure the foreclosure crisis and “clean up [bank] balance sheets so that lenders have confidence that they can lend.” That process, Berner warned, “is not going to happen overnight.”
But Berner’s explanation didn’t fly with the other economists testifying Thursday. Holtz-Eakin said the TARP bill in its current form allows lenders to take taxpayer dollars with no assurances they will use the money to benefit the larger economy.
“There isn’t a private sector institution that has any incentive to clean up its balance sheet,” Holtz-Eakin said. “It just wants to sit there and wait and hope to get rescued. That’s a terrible set of incentives … Fixing the TARP is an imperative for the financial markets.”
Nor did Berner’s testimony appease Sen. Ron Wyden. The Oregon Democrat said his office is being flooded with calls from small businesses that can’t access loans from stingy lenders. To those businesses, Wyden told Berner, “balance-sheet cleanup … doesn’t really resonate in a way that leaves them feeling that their government is moving boldly.”
Later in the day, Wyden voted to block the funding.
Even Berner, of Morgan Stanley, supported the need for stricter oversight of the TARP spending. “You should demand, and should get, accountability for those funds,” he said. “And if that means postponing the vote, so be it.”
Several hours later, the Senate approved the $350 billion.
Last week, Frank contended that the Democrats would approach TARP oversight with the mindset of Reaganites. “We intend to trust, but verify,” he said.
It appears now that they will just have to trust.
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