Of TARP and the Debt Limit

We Had to Tank the Economy to Save It?

Oh no.

Not again.

In September 2008, the House, under Nancy Pelosi, was preparing to take up the Emergency Economic Stabilization Act, better known later as the TARP bill.

With financial markets unwinding at an alarming pace, and credit freezing up from Wall Street to Main Street, it was up to Congress to intervene and take decisive action to save the economy from almost certain collapse.

The action wasn’t taken lightly or easily.

Democrats opposed helping “greedy bankers” while average Americans were losing their homes and jobs.  Republicans opposed bailing out bad decision making by bankers and financiers.

But the unprecedented size of the crisis left only two choices; government intervention or economic collapse.

On September 29th, the House voted. Speaker Pelosi lost 40% of Caucus in the vote. But the Republican votes that Republican Leader John Boehner had promised did not materialize as conservatives bolted at the last minute.

The vote failed, 228-205.

And the stock market promptly dropped 800 points; its greatest one-day point loss in history, roiling global financial markets and causing additional panic rooted in political uncertainty.

And so here we are again.

Last night, unable to sway enough conservative Tea Party Republican votes to support his debt ceiling/reduction plan, now-Speaker John Boehner called off an expected vote.

The canceled vote represented yet another wasted day on a clock ticking down to the nation reaching its debt limit in four and a half days.

Without an agreement to raise the debt limit, the US government cannot borrow additional money. The Obama administration will have to prioritize government payments from inadequate monthly income taxes, starting with bondholders (to stave off default) and then to a list of worthy and competing domestic recipients.

There will not be enough money for all government programs, meaning at least a partial government shutdown. The impact from Wall Street to Main Street of actually reaching August 2nd remains troubling at best.

American business leaders sent a letter to President Obama yesterday stating, ” The consequences of inaction [on the debt ceiling]— for our economy, the already struggling job market, the financial circumstances of American businesses and families, and for America’s global economic leadership — would be very grave.”

As if to accent the point, the major rating agencies are said to be preparing to downgrade US debt as a result of a failure to reach an agreement.  The first time since 1941 that the US lost its AAA rating. The cascade impact will be real and measurable.

But as in the TARP debate, in this most recent crisis, it is the most conservative Republicans who blindly follow an ideological path, uninterested in facts and untethered from the consequences of their actions.

Look no further than  Representative Harold Gowdy of South Carolina.  His opposition to the the Boehner debt limit plan is rooted in the fortunes of another South Carolinian, J. Gresham Barrett.

Barrett, a member of the House in 2008, was strong armed into supporting the TARP bill. In his 2010 run for governor, Barrett was targeted by conservatives for the apostasy of supporting TARP, and lost the primary, to now Governor, Nikki Haley.

Gowdy’s lesson, paradoxically, is that in supporting the leadership on a matter of critical national importance, you open yourself up to political vulnerability.

But there are two lessons from the TARP debate and aftermath that Tea Party Republicans need to be conscious of before they once again try to force the economy off the cliff in support of policies that have no chance of being approved.

First, after the TARP vote and the ensuing economic panic, Harry Reid quickly came up with a modified TARP bill that passed the Senate 74-25.  The bill contained $150 billion in additional, extraneous spending, and 451 additional pages of regulations that no one had any time to review.

Under pressure from the markets to do something, the House approved the Senate bill, 263-171, with the additional spending and regulations that would not have been included had the House passed the original, clean bill.

And here’s the second and more important lesson.  The apocolyptic diaster that conservatives anticipated with the approval of TARP never occured.

Indeed, TARP was an unqualified success.

Yes, you read that right, TARP was an unqualified success.

It is a strange irony that the conservative poster child for government run amok is a program that was stood up and shut down in less than three years, used less than half of its appropriated funds ( $350 out of $700 billion) and will return the proceeds with interest to the Treasury – providing taxpayers with a profit – while achieving its over-arching goal of stabilizing financial markets in the worst financial crisis since the Great Depression.

If anything, TARP is a model of what focused, high impact, results oriented government programs can achieve. But that record and message is lost in a sea of angry and uninformed rhetoric.

Yes, government intervention in the private market is conceptually wrong. Government shouldn’t be in the business of picking winners and losers.  Taxpayers shouldn’t be on the hook for bad corporate decision making.

But 2008 was an unprecedented crisis, requiring an unprecedented response.

The debt ceiling debate is no different.

And indeed, Tea Party conservatives are playing on much more favorable ground now. They have extracted a trillion dollars in cuts over ten years, with the promise of an additional $1.6 trillion in cuts by January, under the Boehner plan.

But its not enough.  They want more. What does it actually take to get to yes?

As Charles Krathammer writes today, as strong supporters of a strict constructionalist view of the Constitution, Tea Party conservatives should be the first to recognize that the separation of powers prevents a minority from commanding its will of a majority.

So long as Harry Reid runs the Senate and President Obama occupies 1600 Pennsylvania Avenue, the Tea Party goals are unachievable.  Holding out, as the Tea Party Republicans are doing, for measures that could not pass the Senate under any circumstances, or command the support necessary to override a presidential veto are nothing short delusional.

Had conservative Republicans prevailed in 2008, the economic damage of government inaction would have led to an economic calamity that would have been orders of magnitude greater that what we ultimately faced.

Now, in the driver’s seat in the House, Tea Party conservatives have the power today to do what they could not accomplish in 2008.

Will they take yes for an answer and build on their momentum to replace Messrs Reid and Obama, and finally reform entitlements, cut unnecessary spending and make the tax code a catalyst for economic growth?

 Or will purity force a walk down the road leading to political disaster and economic calamity?

This shouldn’t even be a choice.