Conservative Principles Now

The special inspector general for the TARP program, Neil Barofsky, has made a reputation for himself by issuing tough assessments of the troubled federal program for troubled assets. It’s been a problem for Tim Geithner’s Treasury Department. No one, after all, wants a watchdog at their heels. Treasury’s solution: muzzle the dog.

Specifically, Treasury is considering excluding the special Inspector General — known as “SIGTARP” in bailout circles — from the new $30 billion small-business lending program announced by President Obama in his state of the union address.

The new program — under which community banks would be given access to low interest funds to lend to small businesses — technically is not part of the original TARP, and needs to be approved by Congress. The funding for the program, however, comes from the leftovers of the original $700 billion TARP authorization. And, many of the recipients will be the same — in fact, some $11 billion in TARP funds now held by banks would be eligible for conversion to the new program. And to a large extent, the issues and concerns raised by the programs are identical.

Word of his possible emmuzzlement triggered a sharp response from Mr. Barofsky. In a letter to the Treasury Department, he referred to the proposed exclusion as a “curious change,” one that would be “terribly wasteful and lead to duplicative efforts and, at worst, could lead to significant exposure to waste, fraud and abuse….”

The Obama Administration insists that no decision has yet been made on SIGTARP’s role. It is reportedly concerned, however, about getting banks to participate in the new program, many of which are healthy and wouldn’t relish TARP’s restrictions and scrutiny.

That itself should raise red flags: since when is convincing healthy corporations to take taxpayer money a serious public policy problem? But even if it were, dropping protections against waste of such money is hardly the way to address it. The sorry history of TARP shows us we need more snarling watchdogs, not fewer.

The Congressional Oversight Panel (COP), the watchdog board created by Congress to oversee the TARP program, yesterday issued the equivalent of a severe weather warning for commercial real estate markets. Like the residential market before it, the markets for retail, apartment, and other business properties are facing a wave of defaults which, says the panel, “would trigger economic damage that could touch the lives of nearly every American.”

The numbers are grim. According to the COP, over the next four years $1.4 trillion in commercial real estate loans will come due, of which half are currently underwater, sunk by a 40 percent drop in values since 2007. Total losses could be some $300-400 billion. These losses would be in large part borne by mid-sized and community banks, who tend to invest most heavily in to the commercial market.

Certainly, the negative effects of such a meltdown would be significant. The question, however, is how to address it. The COP admits that there is no easy answer.

Possible steps, according to COP, include using government funds to provide fresh capital for affected banks, buying the troubled assets from the banks, and creating a guarantee funds for loans. In other words, extend the TARP bailout program – or key components of it – beyond its current October expiration date to address the problem.

Policymakers should stop, however, before going down this particular rabbit hole again. As a first matter, this is not the sort of threat TARP was created to address. While economically painful, the situation does not threaten a sudden, catastrophic failure that would endanger the functioning of financial markets. None of the banks at risk would threaten the financial system by their failure. And the effects would be spread out over a number of years.

By contrast, TARP-like intervention would impede the ability of markets to function properly. The COP itself warns of the dangers, saying:

“Any government capital support program can create as much moral hazard for small banks as for large financial institutions, and government interference in the marketplace could result in bailing out the imprudent, upsetting the credit allocation function of the capital markets, or protecting developers and investors from the consequences of their
decisions.”

And that’s only the start of the problems. Would intervention lead to federal control of pay and other business decisions at hundreds more banks? To long-term government ownership? To Americans weary of the side effects of the original TARP, these are real concerns.

Perhaps worst of all, intervention would not address the underlying problem: the fact the value of commercial real estate has dropped. No amount of government cash would change that fact.

Ultimately, the best way for policymakers to address problems in the commercial real estate market — and help the financial institutions and the average Americans that would be hurt by its travails, is to improve the economy on which it depends. And that means reducing, not increasing, government intervention in that economy.