Banks Don't Need to Be Forced to Lend The last thing we need is Congress setting business models.

By BERT ELY

Tomorrow, the House Financial Services Committee will hold a hearing to "discuss priorities" for the Obama administration's use of Troubled Asset Relief Program (TARP) funds. Those priorities could include lending and other directives to financial institutions receiving TARP investments. These directives could be disastrous for taxpayers and the economy if they force banks to engage in unwise lending, or keep weak, troubled banks from being absorbed by stronger banks.

TARP has two major shortcomings. The first is a lack of political support. Congress did not explicitly authorize capital investments in financial institutions when it created the $700 billion program three months ago. The Treasury originally was supposed to buy troubled assets of banks and other financial institutions. It quickly realized that this was unworkable due to challenges in determining asset prices. It then decided to invest TARP funds in the institutions, to increase their capital. But the lack of congressional consent for these investments has understandably stoked controversy about their purpose.

Second, there is widespread confusion about the role capital plays in bank balance sheets, which has exacerbated this controversy. That confusion is evident in comments such as "banks should be forced to lend the TARP monies the government has given them."

Treasury invests TARP funds by purchasing preferred stock in a bank, which adds to the bank's capital. Bank capital, which also includes common stock and retained earnings, serves as a cushion to absorb losses from loans and other bank activities; it is not loaned out directly. Most bank lending is funded by customer deposits and borrowings from third parties (such as the Federal Home Loan Banks).

Potentially, a bank could use its increased capital from TARP to absorb losses from loans and investments already on its books, to acquire banks too weak to remain independent, or to increase its lending. The higher capital boosts a bank's lending capacity because it enables the bank to safely increase its deposits -- and thus its loans -- without increasing its risk of insolvency.

Unfortunately, Treasury has poorly explained the legitimacy of those uses. Congressional debate about TARP may further muddy the waters. A review of these uses show why none should be mandated or barred.

First, even well-managed banks are suffering loan losses as collateral values shrink and the recession deepens. In normal times, a bank would raise new capital to offset those losses. However, the capital markets are not functioning normally, with many sound banks now unable to raise fresh capital.

TARP investments, which increase a bank's capital, therefore serve as a bridge to when normality returns to the capital markets. Because of restrictions accompanying TARP investments, and a jump in the TARP dividend rate after five years to 9% from 5%, banks will have an incentive to raise private capital to finance a buyback of their TARP preferred stock. Taxpayers will profit from these TARP investments because of the dividends paid by the banks on the preferred shares the Treasury purchased.

Second, weak banks need to be acquired by well-managed banks rather than being propped up by TARP investments, for weak banks are not good lenders. The continued existence of weak banks will impede the economic recovery.

However, an acquirer needs to realistically account for losses buried in the other bank's balance sheet even though this accounting will reduce its own capital. The TARP investment should therefore ensure that the merged bank is well capitalized. Eventually, that bank would raise capital to retire its TARP stock.

Third, while a TARP investment increases a bank's lending capacity, lending mandates -- such as that a bank must increase its outstanding loans by some multiple of its TARP investment -- could force banks to make new bad loans.

Unfortunately, banks accepting TARP investments must, under the contract governing Treasury's investment in the bank, agree that Treasury can "unilaterally amend" the agreement "to comply with any changes . . . in applicable federal statutes." Through this provision the new Congress can impose on banks with TARP investments lending mandates or other obligations and restrictions, such as barring the use of TARP funds to acquire weak banks. Even worse, Congress may legislate credit allocation, such as directing that a certain percentage of a mandated lending increase must go to a favored class of borrowers.

Banks are in the lending business: They do not need to be forced to lend. And contrary to popular and political opinion, banks have not stopped lending. Despite the recent financial market turmoil, a declining GDP, and an increase in loan-loss reserves, commercial bank lending actually grew $336 billion, or 4.9%, from August to Dec. 24, according to Federal Reserve data. While lending dictates or other restrictions may be tempting, the Obama administration must discourage Congress from imposing them on recipients of TARP investments.

Mr. Ely, the principal in Ely & Co., Inc., is a financial institutions and monetary policy consultant.

Pigs At The Trough

by Cal Thomas

Like pigs waiting in line to get their snouts in the feeding trough, come many of the nation's governors -- on the heels of the mayors -- asking Washington for bailout money.

Democratic governors from overspending states like New York, Wisconsin, New Jersey, Massachusetts and Ohio are among those seeking financial deliverance. The governors want Washington to pony up $1 trillion for their absolutely-essential-non-negotiable-if-we-don't-get-the-money-people-will-starve programs.

New York Governor David Paterson claims that, because tax revenues have plunged, 43 states now have budget deficits totaling around $100 billion. No, those states have deficits because when times were good and the money was rolling in they thought they could get away with endless new programs, while putting little or no money aside for the inevitable rainy day. Neither did they consider which programs were necessary and which ones were just politically beneficial. Or, maybe they did and they opted for politically beneficial, thus creating their problem, and ours.

Notice the sleight of hand about to be perpetrated on hardworking taxpayers. In the end, it is we who pay for the plans of politicians who are unable,
or unwilling, to control themselves when it comes to other peoples' money. When Republicans cut taxes, Democrats scream about growing deficits. But Democrats never worry about the deficit when they spend more than what the government takes in. So it really isn't about the deficit at all. It is about how much of our hard-earned money the Democrats, mostly, will allow us to keep. When you understand this, you understand everything about politics and politicians.

Every program created and sustained by Democrats (and increasingly some Republicans) must be kept. Once created, they must continue, no matter how unnecessary, outdated, or corrupt they become. The proof of eternal life is to be found in government programs, which are harder to kill than a vampire, another blood-sucking beast.

The incoming Obama administration wants to spend gobs of money on "infrastructure," creating government jobs that will end when the work is completed. Isn't infrastructure primarily supposed to be the work of state and local governments? Isn't the gasoline tax supposed to go to build and repair local roads and bridges? The federal responsibility should begin and end with the interstate highway system.

The governors' request for more money from Washington is also about unfunded mandates, the rising cost of Medicare and Medicaid and a lot of other "entitlement" programs that could have been made solvent during the Bush administration, which tried, but was unable to succeed due to opposition from Democrats who preferred to have an issue rather than a solution.

It isn't that options, other than overspending and misspending, don't exist. The Heritage Foundation's Brian Riedel, Stuart Butler and others (heritage.org), the National Taxpayers Union (ntu.org) and Citizens Against Government Waste (cagw.org) have all written thoughtful and nonpartisan papers on the subject of government pork. The problem is that Democratic politicians (and too many
Republican politicians, which is why the GOP is again in the minority) have refused to adopt them. Again, Democrats would rather foster a dependency on government so that people would be less self-reliant and more dependent on politicians for their current and future welfare.

This is a formula for socialism and for whatever political system follows to enforce it, though socialism advances even in our supposed constitutional republic. Anyone who relies less on themselves and more on government will see their freedoms erode. It has always been this way.

If this growing dependence on ever more costly and overreaching government continues, we may have to change the familiar letter abbreviation for this country from USA to ATM.

Sarah Palin

Governors to watch Governor Sarah Palin Alaska (R)

Big Brother/Backseat Driver

For lo these many years, the Democratic motorcade class has scolded American workers for driving gas-guzzling cars. Now that Americans have begun driving more fuel-efficient cars and driving less, how have the finger-waggers reacted? No, they are not planning a parade — they already are working on a new tax on miles driven to make up for lost gasoline-tax revenue.

With the help of a six-year, $2.1 million federal grant, Oregon Gov. Ted Kulongoski is moving forward with a proposal to tax Oregon drivers for the miles they drive. "As Oregonians drive less and demand more fuel-efficient vehicles, it is increasingly important that the state find a new way, other than the gas tax, to finance our transportation system," Kulongoski told the Albany Democrat Herald.

Why not simply raise the gas tax so that Hummer owners continue to pay more than drivers of four-cylinder put-puts?

"It's very difficult to raise the gas tax when the price of gasoline is so volatile," answered James Whitty, Kulongoski's point man on the Oregon Mileage Fee Concept. (In lieu of the term "concept," many Oregonians might prefer to substitute the word "squeeze.") Politically, Whitty explained, raising taxes has been untenable in Oregon and on Capitol Hill since 1993.

In November 2007, a task force released the findings of the Road User Fee Pilot Program. Guess what: It found that a road tax has more advantages than disadvantages. In that self-congratulatory tone perfected by bureaucrats who have succeeded in finding what they always planned on finding, Whitty noted in the report, "The Oregon Department of Transportation concludes that the Oregon Road User Fee Pilot Program tested the critical elements of the Oregon Mileage Concept and yielded the result — Concept Proven."

Not so fast, buckaroo.

If the goal of the green brain trust is to reduce gas consumption, then Oregon shouldn't dump a tax that punishes guzzling and replace it with a tax that dings Hummers and hybrids alike. (Whitty noted that the state could choose to charge gas-burning wheels more per mile than itty-bitty cars. Hello. That's what the gasoline tax already does.)

Whitty believes that the state should prepare for the day when 100-mpg vehicles and electric cars dominate the road. Oregon, he noted, boasts the country's highest ratio of hybrid cars -- 30,000 out of 3.8 million vehicles. With oil trading below $50 per barrel, there would be less incentive to buy a hybrid -- yet the green trust is busy working on another reason to not buy a hybrid. Some critics have privacy issues with under-the-hood transponders that could track where a car travels. No worries, the 2007 paper asserts the Oregon plan "protects privacy. Places driven cannot be revealed nor are they stored."

Maybe the pilot program was set up that way. But Whitty told me the transponders are supposed to track out-of-state driving. And down here, where I get a regular bill with the dates and times for when I paid to cross the Bay Bridge, it's hard to imagine that after built-in transponders are standard in every new auto, nanny state governments won't come up with a menu of behaviors beyond driving too much -- as in, driving in cities, driving during rush hour -- to enable states to levy extra taxes.

Follow the money and the red flag. The road-tax report gushes about how mileage transponders can be used to implement "congestion pricing" -- by adding fees for driving in urban areas or during rush hour. Think the London program that charges motorists $15 per day to drive in the central city. Our Betters in Europe like it -- so of course, Davos-happy solons from American cities (San Francisco, New York) want their subjects to support this pricey trend.

Robert Poole, director of transportation studies at the Reason Foundation, thinks a congestion tax makes sense for London and "probably makes sense for Manhattan." But: "There's not enough congestion on the streets of San Francisco to make congestion pricing a solution to a real problem. It's a solution looking for a problem."

My big fear isn't being tailed by a black helicopter on my way to the grocery store. My fear is that that enviro do-gooders will use this unnecessary road tax to devise new busybody regulations just to keep me out of my car -- when gridlock, the cost and stress already serve as disincentives.

My fear is that my tax dollars will be used to bankroll a scheme to punish me for using roads my tax dollars already paid for, because some day I might own an electric car.

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