One More Point on Rove

http://www.futureofcapitalism.com/2010/03/one-more-point-on-rove

Karl Rove is covered more extensively in the book review, but the former Bush aide makes another point here in an interview with Politico's Mike Allen that is worth having a look at.

Mr. Rove says: "Look, the bank bailout worked. ..it was the right thing to do and it worked, and both President Obama and President Bush supported it. President Bush loaned the banks $240 billion with the understanding that they would have to pay it back and they had to pay interest and dividends along the way. President Obama lent $7 billion to the banks, mostly smaller banks, and all of that $247 billion, virtually all of it is going to be repaid, there's going to be interest and dividends, and we will end up making a profit on that $270 billion—$247 billion. Where we're going to lose money is what was not anticipated which is the money that President Obama lent to the car company—to some car companies—Chrysler and GM, not Ford—and to their financing arms and to AIG. The administration has already admitted in a report several weeks ago that the cumulative losses of the entire program will be $83 billion, meaning there'll be nearly a hundred billion dollars of losses they're willing to admit today on the $300 billion that they lent to the car companies. We'll make money on the 247; we'll lose money on the 300. Bush was the principal driver behind the 247; Obama is the principal driver behind the 300."

Mr. Rove's claim notwithstanding, the fact that government will "end up making a profit" or "make money" on a particular program is not necessarily a sign that it is the right thing to do.

Those profits or money don't just come out of thin air -- in the case of the banks, they come right out of the pockets of the shareholders, or out of pools of capital that might otherwise be used to make loans that will help get the economy growing. That's a particularly important point to remember given that at least two major banks, Wells Fargo and BB&T, say they were forced to accept the TARP money. (For the details on Wells Fargo, see here and here; for BB&T, see here.) It's not a great surprise that the government was able to make money from a program in which it used its own awesome power to dictate terms to the bankers.

The government could "make money" by announcing tomorrow it is raising certain taxes. But that doesn't mean it's good policy. The government could announce tomorrow that it is going to start a fast food chain to compete with McDonald's, and write a law to both give itself an exception from minimum wage laws and to require all federal employees to eat five meals a day there. The GovBurger chain could end up being profitable and "make money" for the government. But the cost is larger government, an erosion of the presumption that government will stay out of the private sector, and losses for shareholders in McDonald's and Burger King.

In fact, if a government activity is profitable, it's sometimes an indication that the activity might better be performed by a private company. In capitalism, seeking to make profits is generally the role of private individuals and firms, not the state.

I can understand why Mr. Rove might see the profits as some kind of consolation, evidence that the taxpayers somehow weren't really subsidizing the bankers at Goldman Sachs and JPMorgan Chase. It makes sense on a certain level. But if no subsidy was needed, why have the TARP program in the first place? Even if the bet turned out well in the end for the government, was there some risk it wouldn't turn out well in the end?

Mr. Rove isn't even correct on the facts when he refers to "the money that President Obama lent to the car company—to some car companies—Chrysler and GM, not Ford—and to their financing arms and to AIG." The Bush administration put $40 billion into AIG on November 25, 2008, $4 billion into Chrysler on January 2, 2009, $1.5 billion into Chrysler's financing arm on January 16, 2009, $13.4 billion into GM on December 31, 2008, and $5 billion into GMAC on December 29, 2008. All this was before President Obama took office. Mr. Obama kept two of the key players -- Ben Bernanke and Timothy Geithner -- who were doing these deals in the Bush administration, and he promoted Mr. Geithner. It's a real, partisan stretch to argue that the Bush TARP was somehow good and the Obama TARP was somehow bad.

The biggest surely lost bet so far under TARP was the $2.3 billion that was invested in CIT Group on December 31, 2008, during the Bush administration.

"It worked," Mr. Rove says. Usually when people say this they mean it worked to prevent more big banks from going out of business, or worked to prevent another Great Depression. But it's hard to tell what would have happened without TARP. Maybe there wouldn't have been another Great Depression. Maybe the prospect of the government coming in and diluting bank shareholders scared away private capital that otherwise would have risen to the opportunity. Certainly such private capital was scarce after the Bush administration's "ambush" of Fannie Mae shareholders. TARP certainly "worked" to reinforce the idea that when businesses are in trouble, the government should come in and buy huge pieces of them, but it's not clear that is an idea that is one that "a conservative in the fight," as the subtitle of Mr. Rove's book has it, should be promoting.

Anyway, it's interesting that this is the view of Mr. Rove, who, as a weekly Wall Street Journal columnist and frequent Fox News contributor, has a significant platform in mainstream conservative and Republican politics.

The flip side of all this is that Elizabeth Warren, a left-leaning law professor who chairs a Congressional TARP oversight panel, seems to share Mr. Rove's profitability yardstick for judging TARP as a success or failure. The Wall Street Journal reports that she's worried that the government hasn't yet gotten its money out of GMAC. "More than a year has elapsed since the government first bailed out GMAC, and it is long past time for taxpayers to have a clear view of the road ahead," the Journal quotes a report from Professor Warren's panel as saying. With the Treasury department focused on encouraging long-term thinking rather than short-termism among American investors and managers, Professor Warren sounds a lot like she wants Treasury's GMAC investment managed with an eye on the short term. Never mind the exit strategy, why was the investment made in the first place? Clearly the potential for a profit wasn't the only criterion. Who are the beneficiaries of the taxpayers' GMAC investment, and who will pay the price?

Anyway, these are a complex set of issues, but look around on both sides of the partisan divide, and it's hard to find clear enunciations of principles, let alone actions that are consistent with them.

by Ira Stoll  |  Mar 12, 2010 at 12:32 am Related Topics:  Banking, Capital Markets Regulation, Federal Reserve, Goldman Sachs, Government ownership, Henry Paulson, Politics, Press, Timothy Geithner receive the latest by email: subscribe to the free futureofcapitalism.com mailing list