Congressman Sherman: “Geithner’s Proposal is ‘TARP on Steroids’ “

Paul Volcker and senior Harvard economist Jeffrey Miron both testified to Congress this week that the government is trying to make bailouts for the giant banks permanent.

Writing Wednesday in The Hill , Congressman Brad Sherman pointed out that :

In my opinion, Geithner’s proposal is “TARP on steroids.” Section 1204 of the proposal [the proposal being the “Resolution Authority for Large, Interconnected Financial Companies Act of 2009”] allows the executive branch to use taxpayer money to make loans to, or invest in, the largest financial institutions to avoid a systemic risk to the economy.

Geithner’s proposal reminds me of the Troubled Asset Relief Program (TARP), the $700 billion Wall Street bailout adopted last year, but the TARP was limited to two years, and to a maximum of $700 billion. Section 1204 is unlimited in dollar amount and is a permanent grant of power to the executive branch. TARP contained some limits on executive compensation and an array of special oversight authorities. Section 1204 contains absolutely no limits on executive compensation and no special oversight.

When I asked Geithner whether he would accept a $1 trillion limit on the new bailout authority (if the executive branch wanted to spend more, it would have to come back to Congress), he rejected a $1 trillion limit, insisting that the executive branch be able to respond without coming back to Congress.

Both TARP and the Treasury proposal have vague provisions under which taxpayers might possibly recover any money lost through a special tax on the financial services industry. Under the Treasury proposal, only the very largest institutions could benefit from a bailout, but the special tax, if ever collected, would fall chiefly on medium-sized institutions.

Thus, the medium-sized institutions will be at a competitive disadvantage for two reasons. First, the largest institutions will be able to borrow money more cheaply because their creditors will believe that if the institution is unable to pay, the taxpayers will. Second, if there ever is a bailout benefitting a very large financial institution, the tax will be imposed on the medium-sized institutions.

Sherman is a senior member of the House Financial Services Committee and a certified public accountant, so he has a good nose for analyzing proposed financial regulations. Sherman was the first Congress member to question the legality of the Treasury’s plan to recycle the TARP bailout dollars, which could hypothetically push the amount of TARP funds disbursed above the $700 billion maximum set by Congress.

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  • I think in addition to the socializing losses/privatizing gains moral hazard argument, propping up firms (of any size) eventually creates its own systemic risk under fractional reserve lending.Over time, if debt isn't kept to a sustainable level and cleared via defaults, the system will always eventually collapse under its own weight.

  • The guillotines are being readied

  • What is the point of saving the banks when everybody else go under?The Jubilee Year is supposed to be celebrated every 50 years with forgiveness of all debt and return of properties to their rightful owners, so the Jubilee year is far overdue. If anyone contests that he or she is a bloody anti-Semite!Let the banks go under if they cannot stay afloat and let us establish new, honest banks in their place. First of all, let us never be duped into acceptance of privately owned and run central banks. It is time for civil disobedience of the "masters" who have usurped their role illegally.

  • If the Fed/Treasury only creates 5% of the money supply in the economy and the banks create the other 95% through fractional reserve lending aka debt. What does it tells us when $1000 from the Fed turns into $100,000 of debt from the banks when the Fed has given the banks TRILLIONS!! of dollars and that will only be 5% of the eventually total cascading into the economy….