By Michael S. Rozeff
American government has one good thing about it. It has Inspector Generals. The government ignores what they say, but at least they give us a measure of truth about government.

The truth these days on the extent of government bailouts is undeniably mind-boggling. It may make you feel queasy. It may set off alarm bells.

There is something called The Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP). Congress, you will recall, created the TARP program in 2008 in its Emergency Economic Stabilization Act.

The SIGTARP is a man named Neil Barofsky. I like his honesty. I like his integrity.

Mr. Barofsky tells the Treasury what it should do to administer TARP in an above-board, efficient, and business-like manner. The Treasury ignores what he says. Consequently, no one out here knows what’s happening to the money; and probably no one in there at the Treasury knows either:

"One of SIGTARP’s first recommendations was that Treasury require all TARP recipients to report on the actual use of TARP funds. Other than in a few agreements (with Citigroup, Bank of America, and AIG), Treasury has declined to adopt this recommendation, calling any such reporting ‘meaningless’ in light of the inherent fungibility of money."

Congress is doing one main thing. It is having the Treasury buy loans and debts (like mortgage loans, credit card loans, auto loans) that banks created in the boom. The government is also buying the securities of banks. It is not paying ready cash from tax collections or its bank accounts for these loans and securities. It does not have the vast amounts it is spending, and it cannot tax us enough to cover the amounts being spent. So instead it is buying them on credit in the same way that you or I buy something on credit. It is taking out loans to get the cash to buy these other loans. The government does this by running big deficits and issuing Treasury securities.

These exchanges with banks are not sales in an open market. They are negotiated. The prices of the exchanges are unknown.

Even if the Treasury executed these transactions in an entirely above-board way, the program would still fail. That’s because the strategy the Congress is following in order to stabilize the economy cannot stabilize the economy. No economy can be made productive and efficient by people (through their government) buying up the bad loans that banks made during a boom. That encourages these and other banks to make more bad loans in the future and rewards them for having made bad loans in the past.

The Congress thinks that an economy works as follows. (1) Consumers obtain funds from banks. (2) Consumers buy things from producers. (3) Producers pay workers who then repay loans. They think that if they deliver funds to consumers, by flooding the banks with the wherewithal to lend, then they can get the economy to grow. In this strategy, the banking system’s provision of funds almost always leads to prices rising in some asset markets, speculation, capital misallocation, and eventual recession and bad loans. The economy does not go onto a sustainable growth path.

The excess loanable funds cause prices in individual markets not to do a good job of reflecting shifts in demand and supply. Market distortions arise and then a recession.

The entire process of government manipulation of bank loans is simply one version of a command economy, and command economies always fail.

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