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Herbert Allison is President Obama’s newly-confirmed head of the Treasury Department’s Office of Financial Stability. On Thursday, June 25, he promised to “emphasize transparency so that you and the American people will know what we are doing with their money, why we are doing it, and how it is making a difference.”
His remarks are heartening. More transparency is usually better than less. And few programs are less transparent than the massive Troubled Asset Relief Program, better known as TARP—the bank bailout legislation enacted last year.
TARP funds go through 25 different agencies. Different accounting standards and disclosure methods prevent apples-to apples comparisons of what agencies are doing with the money. Effective oversight of this confusing mess is practically impossible. This is a frustrating situation for Congress, as well as the public.
The TARP Accountability and Disclosure Act (H.R. 1242; S. 910)— introduced by Reps. Carolyn Maloney (D-N.Y.) and Peter King (R-N.Y.) in the House and by Sen. Mark Warner (D-Va.) in the Senate—seeks to address that problem. The legislation would task the Treasury Department with creating a unified database with all expenditures, listed in one standard format.
The database would be a powerful tool for Congress to navigate TARP’s murky waters. But the bill’s language is unclear as to whether it would be accessible to the public. Where there is transparency for none, the Maloney-King-Warner bill would provide transparency for some. Why not transparency for all?
For Congress to require transparency would be a step in the right direction, but a better option would be for it to scrap TARP altogether. The mere need for this legislation speaks volumes about TARP. Why the lack of transparency? Is it that it is poorly run or that program administrators have something to hide? Neither possibility reflects well on TARP.
TARP’s biggest problem is that it makes the price of risk lower than its actual cost. Say an investment firm puts a lot of money into a risky investment, like securitized mortgages. If it goes bad, the firm pays a very low price; the government bails it out. But that low price does not reflect the cost of the defaulted mortgages, which hasn’t changed a penny. Someone still has to pay for defaulted mortgages. Under TARP, that would be taxpayers. We are all paying the cost of the bad decisions of a few.
Why is this a problem? Because when risks are underpriced, banks and investors take more of them than they should. They’ll get bailed out, so why not? TARP gives banks and investors no reason to avoid the sketchy investments that have contributed to the current recession. In the long run, bailouts backfire, yielding the exact opposite of their intended effects.
TARP’s lack of transparency is a huge risk to taxpayers. The TARP Accountability and Disclosure Act would make TARP more transparent, and deserves qualified support; the public deserves explicit access to the database it would create.
But TARP itself is an even bigger risk. The sooner Congress gains the political will to recover from its bailout fever, the better.