Rescue Plan Sows Seeds of New Kind of Capitalism: Caroline Baum

Commentary by Caroline Baum

Sept. 23 (Bloomberg) -- It is October 2017. The Bureau of Economic Analysis has just reported that the U.S. economy grew at an annualized rate of 1 percent in the third quarter.

This is hailed as ``very good news'' by the president's economic advisers.

And it is, relative to the past couple of years. Government spending, which accounted for 17.5 percent of gross domestic product in 2008 when the Troubled Asset Relief Program (TARP) was enacted to buy bad assets from bad banks, ballooned to 23 percent as the rescue evolved into a permanently bigger role for government.

By the time the government got done punishing success via the Equalization of Income and Wealth Act of 2009, the first key piece of legislation enacted during Barack Obama's administration, there wasn't much incentive for the private sector to innovate.

As initially proposed by the U.S. Treasury and Federal Reserve, TARP had no targeted relief for homeowners at risk of losing their homes to foreclosure. By the time members of Congress got done larding the bill with pet projects and lobbyists had their say, TARP was such a monstrosity it required a new agency, the Federal Legislative Consulting Committee (FLCC), to administer it.

``The root cause of the stress in the capital markets is the real estate correction and what's going on in terms of the price declines in real estate,'' then-Treasury Secretary Hank Paulson had told the American public on Sept. 18, 2008.

Home Price Supports

What better way to get at the root than a root canal?

In the waning days of the Bush administration, the president signed the Homeowners' Price Support Act (HPSA), including a freeze on both foreclosures and home prices.

The results were textbook predictable. Like all price floors, this one created a surplus -- of homes for sale at an above-equilibrium price. The law exacerbated the glut of homes, which was the reason prices were falling in the first place.

Those who wanted to sell their homes below the regulated price had to do it on the black market, throwing in perks to attract buyers.

It wasn't too long before the federal government extended TARP's reach to include the troubled assets of U.S. automakers.

``These illiquid assets are clogging up our nation's highways, not to mention our environment,'' Treasury Secretary Tim Geithner said six months after Paulson, his predecessor, declared the financial system in need of drain-cleaning.

Buy and Hold

The U.S. government had to go back to Congress to approve an additional $500 billion of borrowing authority to acquire cars and light trucks that didn't comply with Title VI of the Clean Air Act on Stratospheric Ozone Protection. A new holding company, USA Auto Inc. was formed to acquire the bad assets of General Motors, Ford and Chrysler while Japanese automakers absorbed the healthy parts of the companies producing fuel-efficient autos.

Of course, with U.S. demand slumping, the prices of commodities took a dive, removing one incentive for research and development into renewable energy. The Commodity Futures Trading Commission lowered the required margin for anyone wishing to speculate -- from the long side, of course -- in energy futures.

Meanwhile, the Securities and Exchange Commission's ban on short-selling of 799 financial stocks, which has been extended 48 times and broadened to include whatever industry group was sagging, wasn't having the desired results. In a desperate effort, the SEC declared that ``Stocks for the Long Run'' -- a charming relic from the era before government consumed all of national saving -- would become official U.S. policy.

Price Caps

Any investor who sells a stock, stock index, or futures and options tied to either during the five-year mandatory holding period will incur a penalty fee in addition to the 50 percent capital gains tax.

The only good news about SEC Rule 2,786 is that the stock market long ago ceased to generate gains.

Government borrowing for TARP had skyrocketed, sending long- term Treasury rates to 7 percent. With the economy limping along, the Treasury had no choice but to fix long-term interest rates at an artificially low 4 percent.

The labor force was barely growing, and trend productivity growth had slumped to 1.5 percent, low long-term rates proved overly stimulative, forcing the Federal Reserve to raise its benchmark overnight rate to keep the economy from overheating.

The International Monetary Fund, which had long ago relocated to Beijing, continued to issue dire warnings about the U.S. economy. With the budget deficit hitting $750 billion the previous year, the IMF was prodding the U.S. to raise taxes and cut spending to shrink its deficit to a more manageable size.

As I went to press, the Clinton administration (Hillary, not Bill), was working on an initiative to securitize Treasury notes and bonds to diffuse the risk. Unfortunately, so many years had passed since the financial panic of 2008, it was hard finding bankers with an expertise in financial engineering.

(Caroline Baum, author of ``Just What I Said,'' is a Bloomberg News columnist. The opinions expressed are her own.)

To contact the writer of this column: Caroline Baum in New York at cabaum@bloomberg.net.