How's Your Bailout? Financial Edition

The Washington Post reports that 46 firms that received money from the Troubles Asset Relief Fund, otherwise known as TARP or the federal bailout, "had missed required dividend payments to the government as of the end of September".

Analysts expect more bailed-out firms to fail in the months ahead. Others may survive but will struggle to repay the government. Steven Rattner, the former head of the government's efforts to bail out the auto industry, said recently that the full public investment in GM is unlikely to be repaid. Meanwhile, AIG is dismantling itself, selling healthy subsidiaries at what critics say are bargain prices in an all-out effort to get cash to repay the government.

About $400 billion of federal investments remain in the corporate sector, much of it channeled through TARP. Critics of the program say losses were inevitable, in many cases.

There was a reason private investors didn't want to give these failing firms their money. It was a bad investment. Congress was more than willing to invest our money, though.

Uncle Sam's gift to the prudent saver: Less money

Writing in the Washington Post, business columnist Allan Sloan finds more evidence that the bailouts are hurting savers to help spenders.

Here's the deal. The government is spending trillions to keep interest rates down to support the economy and prop up housing prices, and those low rates have inflicted collateral damage on savers' incomes. "It's a direct wealth transfer from savers and retirees to overly indebted borrowers," says Greg McBride, senior financial analyst at Bankrate.com.

Since October 2007, when government intervention in the financial system began picking up speed, yields on the ultrasafe one-year and five-year investments that many retirees favor have tanked. Two years ago, the average yield on a five-year federally insured bank CD was 3.9 percent, according to Bankrate.com. Now it's 2.2 percent, a drop of more than 40 percent. Yields on one-year CDs have almost vanished: 0.92 percent, compared with 3.6 percent. On five-year Treasury securities, the yield is down to 2.3 percent from 4.4 percent. On one-year maturities, you get a minuscule 0.3 percent, down from more than 4 percent in 2007.

Worst Idea of the Weekend

The Hill reports that President Obama is open to the idea of bailing out the nation's failing newspapers.

The president said he is "happy to look at" bills before Congress that would give struggling news organizations tax breaks if they were to restructure as nonprofit businesses.

"I haven't seen detailed proposals yet, but I'll be happy to look at them," Obama told the editors of the Pittsburgh Post-Gazette and Toledo Blade in an interview.

Sen. Ben Cardin (D-Md.) has introduced S. 673, the so-called "Newspaper Revitalization Act," that would give outlets tax deals if they were to restructure as 501(c)(3) corporations. That bill has so far attracted one cosponsor, Cardin's Maryland colleague Sen. Barbara Mikulski (D).

The worst economy since the Great Depression

Justification for the stimulus package and numerous bailouts centered on the historic nature of the economic collapse and the need for government action on the scale of the Great Depression. Really?

The U.S. economy shrunk by a quarter in the first three years of the 1930's, largely in response to government action. Our recent economic woes, while severe, grew out of problems in the financial sector, not from fundamental weakness in the economy. We'll leave aside for now how much responsibility for those problems should be placed on politicians interfering in the housing sector. The data shows us that the recent contraction is nowhere near the scale of the Great Depression, and won't be unless we enact policies as foolish as Smoot-Hawley.

Too big to fail

Looks like we'll be bailing out another public infrastructure project:

Actually, I have a feeling that this will be a fully operational battle station much sooner than anticipated.
Hattip: Greg Mankiw

Good news for Chrysler and taxpayers

UPDATE- Never mind.

President Barack Obama announced Thursday that Chrysler would head into bankruptcy with the aid of up to another $8 billion in taxpayer money, a last-resort attempt to quickly restructure the struggling giant. He blasted hedge-fund creditors whom he said held out for a richer deal.

Chrysler will file for bankruptcy, rather than bureaucracy, after negotiations for a taxpayer-financed bailout broke down. This means the flailing U.S. automaker will get to restructure and perhaps come back under competent management. The Washington Post has more:

Under the administration's detailed plan for a "surgical bankruptcy," ownership of Chrysler would be dramatically reorganized, the leadership of Italian automaker Fiat would take over company management and the U.S. and Canadian governments would contribute more than $10 billion in additional funding.

Company and government officials had feared that a bankruptcy would stain the brand, shake customer confidence and erode sales, but the administration said it would seek to use the process to create a new Chrysler company. Its ownership would be divided, with the company's union retiree health fund receiving a 55 percent stake, Fiat would claim as much as a 35 percent share and the United States would take 8 percent. The Canadian government would receive two percent.

Years of building cars that were too expensive and not reliable enough stained the brand. Bankruptcy merely acknowledges reality. This gives Chrysler a chance to make up for decades of bad decisions and come back to compete in the highly competitive automotice marketplace.

Of course, what's best overall isn't best for everyone involved. Employees will be probably be better off working for a car company with competitive wages than not working for a defunct car company with higher wages. Retired workers will get hit. There is no way that Crysler could ever have afforded the pension promises it's made over the years, and bankruptcy opens the door to renegotiating those commitments.

A polically-mediated bankruptcy, with politicians picking how and when the company restructures, isn't optimal. But it's probably going to lead to a more competitive company than the disasterous GM bailouts.

Stimulus may worsen state budget woes

By CHARLES M. ARLINGHAUS

The bill formerly known as "stimulus" has gradually morphed into a gigantic Christmas tree that no longer promises to help, but rather threatens the fiscal stability of state and local governments.

With recession on our minds, the federal government began pushing the idea of using government spending to help the economy a year ago. In February 2008, George Bush pushed through stimulus checks to taxpayers costing a mere $168 billion -- chump change after the trillions in debt he was busy running up.

It turned out neither the $500 check he sent you nor the massive deficit spending managed to stave off the recession. It doesn't matter; we're going to try it again anyway.

Last October, they upped the ante and decided to print $700 billion to send initially to banks and then to car companies. Without it, we were told, we faced another Great Depression. It had to be a huge number to convince markets we were serious. So far, they're not convinced.

The next big idea was infrastructure. Instead of giving you money to pay bills or buy a TV, which is made overseas anyway, let's take lots of government money to pay directly for roads and the like. The idea is to give the money to state and local government to build roads, fix bridges. We build stuff, right here, right now.

President Obama talked about spending money only on "shovel-ready" projects. We weren't going to plan new things that would take a while, but we would immediately infuse the economy with billions of dollars in every state. The phrase "shovel-ready" was a good summary: "shovels" because these projects were substantive dirt-and-bricks-and-pavement kinds of things, and "ready" because it would happen immediately, if not sooner.

Remember, though, that Washington is a town without fiscal discipline of any kind. A giant spending bill like this wanders through, and everyone will take the opportunity to add a little here and there. As a result, the bill has become enormous and complicated.

We're told that the Senate "slashed" $100 billion off the House version of the bill, yet the Senate ended up spending $19 billion more ($838 billion versus $819 billion, according to Bloomberg). That sort of math goes a long way toward explaining the nation's debt problems.

Simplicity has also gone out the window. The spreadsheet summary of the bill contains more than 400 line items (I've posted it on www.jbartlett.org). The Washington Post published a flowchart of where the money is going. It will make your head spin.

If the $800 billion were divided up by population, New Hampshire would receive a grant for about $3.5 billion. Instead, we were told this week that the state will receive about $130 million for roads, bridges and trains.

The rest of the money will go to programs that don't necessarily need a shovel and aren't ready. In fact, the Congressional Budget Office found that only $107 billion (about 13 percent) of the package will be spent the first year. By the end of 2010, about half of the so-called stimulus will be busy providing "immediate help."

The sad truth is that any bill in Washington becomes a political football and is used to pay for other programs people weren't able to pass on their own. Just about everything the government does will be rationalized by some congressman as "helpful for the economy."

At the state and local level, everyone still sees dollar signs. Local wish lists total $2.4 billion. How many of those projects are things we would do if we were spending our own money? The danger is using the lure of "free money" to do things you might not otherwise do instead of paying for existing priorities.

At the state level, there is a risk that lawmakers will use one-time bailouts from the feds to cover up a serious budget problem. With revenues continuing to deteriorate, the next budget will be close to $600 million short, even if lawmakers freeze state spending for two years. If that hole is papered over with one-time grants from the federal government, the problem will be merely delayed, not fixed.

Bailouts and other one-time grants ought to be used for projects, such as bridges, that are one-time capital expenses. A one-time windfall can't support operating expenses that will recur year after year.

We stand at a crossroads. The governor has a great opportunity to lead us down the right path when he presents his budget tomorrow. At the beginning of the year, he said that we got into this budget mess ourselves and we need to solve it ourselves. His budget can and should be based on a solid financial foundation, not one-time, evaporating revenue. That sort of fiscal leadership will earn broad support irrespective of partisanship.

Charles M. Arlinghaus is president of the Josiah Bartlett Center for Public Policy, a free-market think tank in Concord.

UL Ed Page Bashes Stimulus

The Union Leader this morning dedicates serious real estate to bashing the stimulus bill passed by the House, both in its lead editorial...

We were told that it would keep people from winding up on the streets. Only $11 billion goes to housing assistance.

We were told that it would help Americans who got laid off. Only $4.6 billion goes to employment and training programs, and $27 billion to expand unemployment benefits. (By contrast, the bill raises Medicaid spending by $89 billion.)

We were told that it had to be passed immediately. But the Congressional Budget Office notes that large portions of the spending cannot even begin until spring and will take three to eight years to complete.

The Wall Street Journal calculated that only 12 percent of the bill's provisions can accurately be called stimulative. The rest is simply being thrown at favored constituencies by Congress. The bill even includes a provision forbidding the use of foreign steel in the construction projects it funds. Does no one in Congress remember Smoot-Hawley?

And in an Op-Ed from former HHS Commissioner John Stephen:

The premise behind the "stimulus" bill is a belief in the debunked Keynesian notion that government spending creates a multiplying effect that accelerates economic activity. This belief continues despite numerous failed attempts at this policy, including in Japan and during the New Deal.

What those proposing this irresponsible plan miss is that the money for this spending has to come from somewhere, and that means borrowing it. However, taking money out of the economy only to put it back into federal programs gets America right back to square one. The only way this will improve the economy is if the federal government can use that money more efficiently than the private sector can. Anyone who believes this should call me because I have a bridge in Brooklyn I'm trying to sell.

Stimulus Bill Now Online

The proposed stimulus bill is now online.

The Committee Report is also available.

This legislation does not detail which specific projects would receive federal funding, or how much each state will receive.

It does contain an extra billion dollars for the 2010 Census, $200 million for the National Mall in Washington, D.C., and $150 million for the Smithsonian.

Budgets can't be balanced with windfalls

By CHARLES M. ARLINGHAUS

Rather than helping New Hampshire, a federal bailout of the states has the potential to create a long-term deficit and undermine the financial stability of our state. Free money from the federal government can't be used to balance the budget in any real sense and could create long-term obligations we can't afford to fund ourselves.

Ever since the federal government began printing money a few months ago to help bail out everyone with significant political clout in Washington, governors across the country have looked to the federal Treasury with dollar signs in their eyes.

The feds began the excitement by creating a $700 billion bailout fund to buy troubled assets from financial institutions and also to loan money to automakers. In theory, the government receives assets that may have some future value, or it expects to be paid back when the auto industry recovers.

Nonetheless, governors see the federal government as a big pot of money to tap. States face a discipline unknown to the federal government: They are required to balance their budgets, or at least try to. Where Washington spendthrifts merely nod with amusement at suggestions of fiscal discipline and go off to tax and borrow, the states have to balance spending and revenue. In good times, this is relatively easy. As the economy turns sour, it becomes more difficult.

Enter the state plan to have the best of both worlds. We can balance our budget by merely getting free cash from the big spenders who don't have to balance their own budget. They don't have the money, but they're borrowing so much anyway we can tap them for a few hundred billion dollars.

Today, it is likely that the federal government will borrow money so state governments don't have to, send them a check and not ask for it to be repaid.

If it happens, we must be careful not to count that money toward balancing the budget. It will be a one-time infusion of cash that will have to be replaced later if used for recurring expenses.

State budgets include operating costs and capital costs. When news reports talk about the budget, the revenue shortfall, the looming deficit or state spending, they mean the state's operating budget -- general program expenses that we expect to have for more than just this year.

These programs are the rough equivalent of your household expenses, such as mortgage and utility payments. In your budget, you use wages to pay for them. You don't budget around windfalls, such as an unexpected lottery prize.

The state is no different. Operating expenses can't be balanced by borrowing or bailouts. Rather than fixing the problem, that merely hides the problem for someone else to fix.

The current budget is a good example. The two-year budget was not fully balanced in this sense when it was passed. General fund spending was $106 million more than the taxes the budget expected to raise. Part of the difference was covered by a large transfer from the education trust fund. But about $21 million would have come from surplus money, not revenues.

When the revenue estimates turned out to be high, more money was needed. Much of it has come from one-time revenue sources. The state has borrowed money for operating expenses, received one-time transfers from the Pease Development Authority, and is looking to collect one-time surpluses from other areas. In addition, it spent about $40 million of surplus money to balance the first of the two budget years.

All that borrowing and one-time money means the problems weren't fixed. They merely added to next year's growing problem. A federal bailout presents exactly the same danger. We have to be careful not to use any federal largesse to merely hide an operating budget deficit.

I hope the federal government pares the amount of money it will borrow on behalf of state governments. If it doesn't, we should work to ensure that such money gets spent only on capital costs that don't recur. In addition, we should try to spend it on priorities we have established anyway.

The state should not develop a list of projects that weren't a priority before. If we didn't want to borrow, tax or cut spending to fund something ourselves, borrowed money from the federal sinkhole shouldn't change our mind.

Whatever we do, we should move cautiously so federal help doesn't make things worse.

Charles M. Arlinghaus is president of the Josiah Bartlett Center for Public Policy, a free-market think tank in Concord.

A bailout of states would hurt New Hampshire and America

By CHARLES M. ARLINGHAUS

With the bailout frenzy in full swing, governors have now bellied up to the bar and are asking the new President to turn on the printing press one more time and flood the states with billions of dollars. The irony of having a profligate and deficit-ridden federal government help fix state budget deficits shouldn't be lost on any of us. But for smaller states, this is certain to be a bad deal. Our smaller and more frugal piglets will be pushed away from the federal trough by the prize-winning hogs from the larger, free-spending states.

After Washington spent hundreds of billions of dollars on bankers, insurance companies, auto companies and whoever else, state governors lined up for a bit of federal welfare. At the National Governors Association meeting, the governors asked President-elect Obama to sign them up and please bail out the states.

To be fair, President Bush has done much of the heavy lifting. He's successfully rebranded the federal government as George's Bailout and Backstop Agency -- you snooze, we lose. The feds have now abandoned any pretensions toward balanced budgets or anything approaching fiscal responsibility.

Balanced Budget Amendment? That's the old GOP. The new GOP is all about credit card spending. Surpluses? A quaint relic of the Clinton administration. Yet, despite federal dismissals of fiscal responsibility as archaic, they feel nostalgic about states being required to balance their budgets so they want to help.

Soon-to-be President Obama has agreed to assemble a spending package to help states. The price tag will be hundreds of billions. News reports talk about $136 billion of "shovel ready" spending projects -- roads, bridges and the like -- that are to begin construction almost immediately.

Here's where the politics begin. The federal government could take construction money, which is collected from all across the country, and dole it out equally to each state. Divide $150 billion among 300 million people and each state would receive about a half billion per million people -- $650 million in New Hampshire. That's about twice the size of our highway trust fund.

Equal distribution would amount to revenue sharing. No pork, no politically motivated winners and losers. States that overspent and ran up bigger deficits wouldn't get rewarded with more than their share. Frugal states could bank the money and spend it sensibly over time.

But that sort of politically neutral aid is unlikely to happen. According to The New York Times this week, "Mr. Obama's plan, if enacted, would be in part a government-directed industrial policy, with lawmakers and administration officials picking winners and losers among private projects and raining large amounts of taxpayer money on them."

Concern about Washington picking winners and losers is one of the reasons Gov. Mark Sanford of South Carolina wrote an op-ed titled "Please Don't Bail Out My State." Sanford doesn't want bad behavior rewarded.

As an example, he points out that small, community banks with lending standards are fine, but big banks that made bad decisions are being sent billions. A state bailout will likely be the same. Big states with lots of votes will receive billions at the expense of smaller states that took care of their finances.

Money will be collected from taxpayers all across the country and sent to states that spent money they didn't have. In essence, money will be transferred from well-managed states to poorly managed ones. If any sort of bailout is to go through, bad management must not be rewarded. States that managed themselves well should not be punished.

Secondly, Washington should not pick winners and losers. The whole point of a federal system is to let people in Nebraska decide what's best for Nebraska, not transfer that decision to a Washington bureaucracy. If you must send money to a state, let the people in that state decide what the best use of that money is.

Finally, consider just cancelling the whole thing. The federal budget isn't balanced. The Bush legacy is massive federal debt. Any additional spending is deficit spending. The federal government doesn't have the money, but it will borrow it to help balance state budgets. The governors don't want their states to have to borrow money or cut spending, so they ask the federal government to borrow money and cut spending.

A state bailout is a bad deal for federal taxpayers (all of us), bad for small states with less political power and bad for well managed states.

Charles M. Arlinghaus is president of the Josiah Bartlett Center for Public Policy, a free-market think tank in Concord.