Obama TARP Repayment Plan

Obama just announced a plan to "levy" a penalty on "Wall Street" to the tune of $117 billion. This, he said, is the amount still outstanding from the $700 billion spent on the "bailout." The "levy" would only affect companies with more than $50 billion in assets, and would be paid over the next 10 years.

Oh, its time to start poking some holes... Ever read Ayn Rand's book, Atlas Shrugged? If so, you know what I mean when I say that this raises a dozen red flags. Big red flags.

First off, I'd like to know some more about what he means by "levy." Is it as plainly evil as it sounds? Its not a tax... so I am betting normal codes/laws applying to taxes don't apply here. The government just says "gimme money or else" and there's nothing these companies can do about it. By calling it a "levy," Obama gets to write a totally new rule-book... now American companies must play Obama's game. Or maybe there's something they can do about it? If the companies purposely make their balance sheets look bad, then maybe they escape punishment. Welcome to the race to the bottom! In Obama's game, we will reward the dishonest companies and punish the best and good.

Notice that Obama acknowledges that most of the recipients of TARP money have payed back the loans (way ahead of schedule), but doesn't say anything about these firms being exempt from the levy. Even if they are exempt from the levy, that would only actually make things worse! It would mean that the companies that have so far been unable to repay the loans will have to pay more, which will damage those companies' value, which will be reflected in stock prices, which will make it more difficult for such companies to raise capital, which will handicap Wall Street for the long-term. Is this a good thing?

Now, the companies we are talking about are mostly banks. Its "financial institutions," which means a company which deals with stocks, bonds, commodities, and derivatives. There are two things to be concerned about here; First, it is these companies which provide the financing for new business ventures in America. You want a loan for your small business? You want that loan to be cheap, not cost a ton in interest fees? You will most likely raise the money you need by going to a bank. But if banks have a more difficult time raising their own capital, they will make it more difficult for you to get your loan. We all know this, or should -- it has been the main symptom of the problem which has plagued our country ever since the beginning of this recession. The other problem is the cost of the "levy" being passed on to the consumer -- higher fees for every little thing having to do with your bank account. Me, personally, I'm not too fond of those fees.

Now, I anticipate the next argument I will hear from people who will like this "levy." They will say that Obama already pushed through some law limiting bank and credit card fees and interest rates. I admit that I don't know the specifics of this law, or even if it even passed. But I can think about the abstracts enough to say that in the long run, this might not be good. Products and services go through a "life cycle," from being new and novel to higher competition in the industry to economies of scale to outsourcing to finally maturity. In the maturity stage of a product/service, profit margins become slimmer, the leading firms in the industry start buying out the smaller firms, and finally you end up with something on the very opposite end of the economic spectrum from perfect competition: a competitive environment ranging from a monopoly to an oligopoly -- which means very high market entry barriers, precluding the possibility of more competition, and they will be much more capable of making monopolistic profits. Its really easy to draw a graph to explain it, but I don't think I will bother with putting that graph up on the blog. What it all means is, by putting an industry in a bind, you are really hurting the consumer -- you and me.

Look at Obama's choice of words: he criticized the banks for "massive profits and obscene bonuses." When did making a profit become a crime? Wasn't the whole purpose of the the TARP loans to help our companies make a profit again? As for the bonuses, what else are they going to do with their profits? Give the money away to charity? Don't be ridiculous. They made that profit; they deserve to have the money they worked so hard for. Imagine if you started a business of your own -- make it a corporation and you are the primary shareholder, as you are the one running the firm -- you are an expert in your field, and you work really hard to make it a successful company; Finally, after all your hard work, you have a nice profit, and you think that you will be able improve your life and your family's life; but then comes some person who doesn't like your profits, and at the point of a gun, he self-righteously demands you not take your profit; in fact, it should be given to the people, because you owe your success to everybody else. Is that right? This issue is the same, just the companies and profits involved are bigger -- but that doesn't change the underlying principles. I can explain it further, if more than morality is required. The laws of supply and demand apply not only to the price of goods sold, but to wages paid to employees, among many other things. Graphically, supply can be drawn as an upward sloping curve, while demand is a downward sloping curve, with your price or wages-paid variable on the y-axis, and quantity on the x-axis. Where the lines supply and demand intersect, is the equilibrium -- it says that (under basic circumstances) the price and quantity at the equilibrium are optimal for generating a profit, which also means balancing the needs of society with the needs of the firm. Now what if some comes and demands your profits, as in the previous scenario? That is the same as a tax, and a tax creates a dead-weight loss shared by both the producer and the consumer (depending on the elasticity of demand for your product). It pushes the price up and makes your system less efficient. Do you like paying higher prices? After reading all this, do you still think that Obama is right in saying "profit" as if it were a dirty word?

Oh yeah, great idea Obama; punish companies for making a profit! How dare they make a profit!? They should cease all profit-making endeavors at once!

Get real... I, for one, am happy they are making a profit again! I don't think its wise to do this "levy." The TARP money would have been repaid anyways - it was always a loan, not a gift - there's no point in further punishing the companies.

For more info, read this article.