Discussing TARP and Wall Street Bonuses

In 2008, then President Bush enacted the Troubled Asset Relief Program to save America’s financial industry and, the logic goes, the American economy. Whether or not you agree with this policy from a philosophical standpoint is now irrelevant (though I think that businesses should take responsibility for their bad practices).

TARP remains in the spotlight. First, it is now apparent that the government asked for far too much money. this would normally not be a bad thing except that the Obama administration and the Democrats are now thinking up new ways that TARP can be used by the President, including a new spending initiative to create jobs. Republicans have called this the TARP Slush Fund and condemn it as unwarranted expansion of the federal government’s powers and revenue.

Most recently, TARP has become a talking point concerning large bonuses for “Wall Street” executives, which now refers to any executive of a large company, at companies who sought and received TARP funds. Those companies, like Goldman Sachs and Bank of America, that have paid back their TARP money and are giving out large bonuses are also being included in this discussion.

First and foremost, the American public should be weary when the government advocates for levying large taxes on the incomes of private individuals, for whatever the reason. While this may be justified for those companies where the Federal government is a shareholder, i.e. those companies that have not repaid their loans, it cannot be justified in those companies who have repaid the American public. Government intervention and regulation of what is a “fair” amount to pay executives at private (meaning not government-run) companies is unconstitutional to the core.

Ultimately, what we should take from this is that we cannot have financial bailouts both ways. By this I mean there are two options. the first is that you simply don’t bail out companies. It is not in the scope of the powers or responsibilities of the federal government. Instead, you allow the market to take its course and weed out the inefficiencies and weaknesses in the economy. If companies want to give bundles of loans to people who cannot afford them and all those people default and suck the capital out of a company then it deserves to fail. It was practicing bad business, plain and simple. (Of course, there is much to discuss concerning Chris Dodd, Barney Frank, and President Clinton’s efforts to unnaturally increase home ownership in America by forcing companies to practice bad business. For more on this see my other article, “Playing the Blame Game: Bernanke or Dodd/Clinton/Frank?”) You can allow them to give out all their bonuses and when they fail they will have only themselves to blame.

On the other hand, you can give out TARP funds. TARP funds were given for the express purpose of saving the American financial sector. It is apparent that it has been successful, as many familiar faces in the investment world continue to dominate the headlines. But, if you give out these funds that aim to make these companies successful, how ridiculous is it to then punish them when they become successful again. Once they have repaid the US government, the US government has no more control over them. The President can’t come in and say that now they are too successful and your bonuses are too large and we will penalize you for it.

The American Government can’t have it both ways. Either give out funds to save the financial sector (and when they repay the funds leave them alone) or let these businesses fail for their bad practices and truly pay for their mistakes.

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