The OPINION page in the January 14, 2009 edition of the St. Louis Post-Dispatch contains an article entitled “TARP, with strings”. It generally criticizes banks for hoarding, not lending, the bailout funds received from the government, as well as the lack of oversight or transparency in monitoring the TARP spending. It also discusses calls for imposing more “strings” on the second round of bailout money. Specifically mentioned is a condition sought by Rep. Barney Franks that at least $40 billion of the second round of spending be directed toward preventing foreclosures.

The SLPD’s closing paragraph displays the persistent naivete that seems to permeate its editorial staff. The paragraph reads as follows:

“The posturing by the banking industry — how dare they tell us how to run our business — isn’t helping the cause. It only reinforces the suspicion that banks and businesses are using public dollars to finance another round of profiteering. If banks and businesses want the public money, they must take it, strings and all. And account for every dime of it.”

The assertion that strings should attach to public money makes sense. So does the need to account for all of it. However, the SLPD sounds as if profiteering (as in making money) is some sort of evil. If I lent money to Bank of America, I would hope the bank would use my money to make a profit. That would maximize the prospect of the bank not only paying the interest it owes me on the loan, but also repaying the principal. Making a profit is a good thing, not a bad thing, but the SLPD sounds as if any bank that accepted government money should commit to simply spend it without any plan to ensure that it will pay back what it borrowed.

Remember the savings & loan bailout? It’s my understanding that the U.S. government made a profit on that deal. Was that a bad thing, making a profit? Did the American taxpayers collectively perpetrate some evil by making money on the S&L bailout?

When the financial crisis hit last fall and Congress passed the $700 billion bailout legislation, I recall hearing analysis on news shows that was critical of the initial plan, which focusd on buying troubled assets (i.e., delinquent mortgages) from banks. So-called experts around the world seemed to agree that the British plan was superior to the U.S. plan, and the British plan entailed direct investments by the U.K. government in U.K. banks. Critics of the U.S. plan questioned the feasibility of implementing it, the difficulty of identifying and valuing the mortgages that needed to be purchased.

Whether it was a response to criticism or simply the result of its own intuitive insight, the Bush administration decided that the bailout money could be better expended by investing directly in troubled financial institutions, rather than trying to purchase troubled assets. It seemed to me at the time that the U.S. was essentially following the U.K. model, something the critics had called for. Perhaps the U.S. investments in its troubled financial institutions are not identical in their terms with their U.K. counterparts. Nevertheless, the Bush administration seemed to do what the experts said it should do. It invested directly in troubled financial institutions and refrained from attempting to purchase specific mortgages from specific banks across the country.

Statements of trillion dollar deficits are now flying across the airwaves. Fiscal ‘09 may very well register a trillion plus deficit, largely attributable to the financial bailout spending. However, a deficit of such magnitude is misleading. When an investment is made, generally accepted accounting principles do not prescribe that the investment be treated as an immediate loss or expense. The investment is an asset carried on the investor’s books. So-called “fund accounting” obviously handles this differently. Fund accounting represents a set of rules used by governmental organizations to account for their operations. Fund accounting apparently calls for all of the money spent by Uncle Sam to stabilize the financial system to be treated no differently than salaries it pays its employees. Thus, it is charged against the current year’s operations, thereby enlarging the current year’s deficit. Logically, if and when the money is paid back by the borrowers, the money flowing back into the government’s coffers will be treated the same as tax revenue. It will reduce the deficit.

No doubt, any trillion dollar deficits will be attributed to the Bush administration. I’m sure that is the SLPD’s plan. However, if the SLPD wants President Barack Obama to reap the budgetary benefits that would result in future years if and when the bailout loans are paid back, the SLPD ought to be a little more careful about condemning profiteering by the banks. I’ve used the phrase “if and when” in connection with the banks paying back their government loans. If the banks squander the bailout money, the “if” portion of the phrase will have a better chance of occurring. If the banks are able to make profits with the borrowed money, the “when” portion will be the more likely result.

What result would the SLPD prefer to see?

John Fokl
St. Louis