Why Obama Should End the Bailouts

Now that he's looked closely at the numbers, Barack Obama wants Washington to show some spending discipline. After his gargantuan stimulus package, that is. "We've got trillion-dollar deficits for years to come," he said recently. "We're going to have to bring significant reform ... to the overall budget process.... We'll have to make tough choices, and we're going to have to break old habits." (Transcript.)

Here's one way he could start breaking old habits: Cancel the second half of the $700 billion bailout package passed last year.

Bailout baron Henry Paulson, President Bush's Treasury Secretary, has drawn intensifying criticism for his handling of the misnamed Trouble Assets Relief Program, which has relieved hardly anybody of their troubled assets. TARP's original mission has morphed into another, and another, with money now going to auto companies, insurance giant AIG, and a handful of banks that haven't even been identified.

But in broad terms, TARP did what it was supposed to do: It prevented a panic and started gluing a shattered finanical system back together. There's still a lot of damage that needs to be repaired over coming years, as banks rebuild their balance sheet and governments find better ways to regulate them. But Phase I of the financial bailout is over.

[See why letting Lehman Brothers fail might have been the best move of 2008.]

So why not end TARP altogether - and save Uncle Sam $350 billion? So far, Paulson & Co. have dispensed about half of the $700 billion appropriated for the bailout. To get the rest, the administration - whether Bush or Obama - has to go back go Congress and show why it needs the money.

The case isn't nearly as compelling as it was last September, when the specter of economic Armageddon drove Congress to pass one of the most dramatic spending bills in history. Most of the institutions deemed too big to fail - think Citigroup, AIG, General Motors - have been stabilized with federal money. It's time for them to limp the rest of the way back to health on their own. Meanwhile, real estate developers, retailers, and nearly every interest group in Washington claim that they, too, deserve TARP funds, or else there will be a national catastrophe.

[See 9 reasons why this recession might be good for us.]

Obama should say no. The government's job is to steer a faltering economy back onto the highway, which Obama is planning to do with a gigantic stimulus plan that could total $700 billion or more - in addition to the TARP funds already spent. It's worth reminding all the free-market capitalists who now want a bailout that it is not the government's job to boost the stock markets, save every foundering company, or cover losses due to bad decisions or even misfortune. Come to think of it, the government should remind itself of all that.

[See why more failure in 2009 might be good for the economy.}

That $350 billion in unspent TARP funds would essentially be borrowed money. It's sitting on the table, for Congress and the administration to spend, like a huge, irresistible gift card. But it will need to be paid back in the future. Leaving it on the table would be a good way for Obama to start showing some fiscal restraint, even as he tees up billions in stimulus spending.

There's also the question of directing some of the TARP funds to homeowners facing foreclosure, which is how many members of Congress would like to spend the second $350 billion. But that's a bedeviling challenge that involves evaluating millions of borrowers one at a time, to figure out if they deserve help or not. Nobobdy has soolved that puzzle yet.

[See why the feds rescue banks, not homeowners.]

Some in government want to spend the money anyway, as if a flood of federal funds will lift enough boats to make it worthwhile, even if means billions of misspent taxpayer dollars. Of course, that's how Washington operates. Up till now, anyway.