The following oped by Rep. Ed Royce appeared in the Orange County Register.
Exit polls suggest President-elect Barack Obama won largely because of our economic distress. With the White House in Democratic control, and the Democratic congressional majority expanded, new economic stimulus plans will emerge, all centered on new programs and new government spending.
But before proceeding with new government spending – which we don't have the money for – we should look closely at the financial bailout plan Congress approved last month, which I opposed. Already the $700 billion bailout has had unintended consequences. Unfortunately it seems fairly certain that this pot of money will become politicized, pushing the federal government into businesses from which pulling back will be very hard.
The plan began as an effort to help stabilize our financial system through our major banks – the pillars of American finance. The heart of the plan is the Troubled Asset Relief Program (TARP), which allows Treasury to buy, hold and eventually sell banks' distressed assets, mainly mortgages and mortgage-related securities. Because of the broad authority granted by Congress, Treasury has decided to change course and first buy bank stocks. While direct capital injections could prove effective in stabilizing our financial markets, the plan has quickly become a gravy train with a growing number of recipients.
Predictably, a cottage industry has sprung up to encourage every financial institution in the phone book to tap the TARP. The sales pitch Washington lawyers and lobbyists give banks throughout the country is: Your competition is accessing TARP, getting cheap capital, you'd better, too. Only a few weeks ago using this bailout fund was viewed as a sign of financial unsoundness, a stigma. Today it is being bought as a valued government seal of approval.
Recent headlines suggest the TARP will soon move beyond financial institutions. The Democratic leadership is looking to use it to aid the U.S. automobile manufacturers, again. Only weeks ago, Congress created a $25 billion fund for Detroit. Other U.S. industries are surely eying TARP as well.
One of the biggest reasons we are in dire financial straits is that regulators and members of Congress pressured banks to write, and Fannie Mae and Freddie Mac to back, mortgages people could not repay. The political urge to abuse TARP for political purposes – to give loans to friends, to deny loans to foes – will prove great. At the least, there will be pressure to use TARP to make as many loans as possible, regardless of their soundness. Key senators have already spoken of setting mandates on loans made by TARP beneficiaries. This is too reminiscent of how Fannie Mae and Freddie Mac did business. While current TARP rules are designed to check regulators and the members of Congress who oversee them from playing banker, the new administration and Congress easily could change that.
Supporters say that TARP is a temporary fix. We'll see. History tells us that government programs rarely, if ever, go away. Every government program gains a constituency to guard it, while the taxpayers have too few defenders. While this amount of government involvement in our capital markets is unprecedented, the abuses that appear to be accompanying the TARP are not.
Potentially more harmful in the long run, the line between government and the private sector became increasingly blurred with this massive bailout. Government-owned banks may quickly lead to government-owned automakers.
Instead of considering another massive economic stimulus package consisting of new government spending, we should focus on limiting the abuses surely to come from the previous bailouts and allowing the markets to recover from this difficult episode.
