What a difference eight months make. Last fall, Treasury Secretary Henry Paulson pushed through a bailout program that was seen as the salvation of the financial sector. The banks eagerly lined up to get their share of $700 billion in federal largesse with few strings attached.
These days, aid from the Treasury Department is about as welcome as the heaping spoonfuls of cod liver oil mothers used to force down the throats of their children. Large institutions such as JP Morgan Chase, Goldman Sachs and Morgan Stanley cannot wait to repay Uncle Sam. Several smaller ones have already done so. Allstate just became the second large insurer to announce that it is not interested in the insurance bailout fund reportedly being put together by the Treasury. “Given Allstate’s strong capital and liquidity positions…we will not participate in this program,” sniffed the company’s chief executive Thomas Wilson.
Bailouts are supposed to be situations in which companies come to Washington with a tin cup and plead with lawmakers to save them from obliteration. Lawmakers have to be persuaded to devote public money to rescue those suffering failure in the private market.
Somehow that has gotten completely turned on its head. We now face a situation in which the federal government is in effect pleading with large corporations to take its money, and those companies find it distasteful to do so. Getting bailed out is viewed as burden rather than deliverance. Financial policy has gone from being wrong-headed to being downright bizarre.
Treasury Secretary Timothy Geithner does not seem to be aware of the absurdity of his position. It is unclear why he continues to push his bailout medicine on financial institutions that claim they don’t need it—claims that on the surface have more validity following the completion of the stress tests that were dubious to begin with and lost all validity after it came to light that many banks successfully negotiated for more favorable findings.
To make things worse, Treasury is, according to the New York Times, allowing those banks buying back the feds’ holdings to do so on extremely favorable terms. “Treasury accepted a lowball offer,” one analyst told the Times.
The time has come for Geithner and his boss President Obama to admit that the bailout program has become a farce. There is little evidence that it ever accomplished the stated aim of freeing up lending. Whether or not the banks really needed the assistance in the first place is something that analysts will be debating for many years to come. The auto industry portion may have provided some breathing room for General Motors and Chrysler, but now it’s become clear that the real plan is to increase imports from low-wage countries such as China.
Let’s wrap up this botched flirtation with state capitalism and focus on rebuilding an effective system of financial regulation. Some investigations and prosecutions of those who caused the mess in the first place would also be welcome.