BailOut Is Not Cure-all For Everybody : TARP Must End

More good stuff from the Heritage Foundation on how and why the bailout needs to end.

TARP Is Not the Cure for Future Problems
Stuart M. Butler, Ph.D. is Vice President for Domestic and Economic Policy Studies at The Heritage Foundation.

The first institutional line of defense against these dangers, however, should be the Federal Reserve Board under its wide, existing powers, not the Treasury using TARP funds in ways not intended by Congress. While many of the Fed's actions in recent weeks have been disconcerting, the Fed is still the appropriate institution to address short-term dislocation in the financial system. Moreover, it is insulated from the political and lobbying pressures that necessarily ensnare the Treasury and the White House. If steps turn out to be needed beyond appropriate action by the Fed, Congress should rapidly consider what action is needed--as it did with TARP. And if in the future Congress needs to give the Treasury new powers to deal with another potentially catastrophic breakdown in financial markets, it should include much tighter limits on Treasury's discretionary authority than it did when it created TARP.

What to Do Next

Congress should:

Say no to any request to use the second half of TARP funds. Only $15 billion of the first half of the TARP funds ($350 billion) remain uncommitted. If Secretary Paulson or the incoming Treasury secretary wishes to use the second $350 billion, the Administration must give notice to Congress, which then has 15 calendar days to pass a joint resolution of disapproval to deny use of the money. If such a request is presented, it should be denied.

Repeal the TARP program.

If this Congress reconvenes, and certainly when the next Congress begins its work, it should end the TARP program. Specifically, the authority to spend the second $350 billion of TARP funds, and any remaining uncommitted funds from the program's first $350 billion, should be revoked.

Get to the bottom of the financial crisis. There is still no consensus on the essential causes of the financial crisis or the strategic actions needed to prevent similar crises in the future. It is time for an independent commission to investigate the matter and propose structural reforms in the nation's financial regulatory system, including the laws governing mortgage lending and other requirements on financial institutions that appear to have exacerbated today's problems. The incoming Congress should establish such a commission consisting of respected independent experts, and Congress should agree to conduct hearings and take action on its recommendations.[4]

The commission should:

Explore the origins of the crisis and the activities of such private entities as credit rating agencies, the drop in underwriting standards by private housing lenders, and the role of unregulated mortgage originators.

Examine the operations of the major government institutions involved and make recommendations for changes in their roles. These should include the Federal Reserve Board, the Treasury, and the Securities and Exchange Commission. The commission should also review the charter and operations of the private-public government-sponsored housing enterprises such as Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.

Review specific statutes and programs that might have contributed to the crisis (such as the Community Reinvestment Act and low-income housing programs) and examine both the apparent breakdown of congressional oversight and the links between campaign contributions and the actions of key lawmakers.