Opinion: The Treasury Department’s lengthening reach

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Last month’s post about the hyperbolic assertion that Barack Obama is a socialist drew some thoughtful comments about the gray area between pure free-market capitalism (which no country practices) and a centrally planned collectivist economy (which has some lingering adherents). If there’s a slippery slope toward central planning, though, we’re already on it. The Bush administration is using tax dollars to steer the housing, credit and insurance markets, all in the name of averting bigger problems in the economy.

I’m not arguing against the Bear Stearns bailout, the takeover of American International Group, or the $700-billion rescue of the financial industry. Nor am I criticizing the FDIC’s efforts to reduce foreclosures by reworking some troubled mortgages, even though it could prevent housing prices from falling as far as they otherwise might go. Each move made sense at the time, given the growing problems in the credit markets that threatened to send the entire economy into seizure. Yet the government now finds itself in a market-shaping position that’s the antithesis of Adam Smith’s vision for how capital should get allocated.

Consider the Treasury Department’s $700 billion Troubled Asset Relief Program, which Congress rushed into existence last month. Treasury announced that it would use $250 billion to buy preferred shares in financial institutions, with the hope that the money would be used to issue new loans. By its very nature, the program helps widen the gap between fairly healthy institutions (which qualify for the aid) and embattled ones (which may not). That’s called the government picking winners and losers.

To try to keep the government’s meddling to a minimum, the program attaches few strings to the aid aside from some limits on how much the participating companies can pay top executives. That means there’s no guarantee the money will go toward new loans; it could just as easily be used to maintain the dividends that companies pay shareholders (including the top executives whose pay is newly capped). Another potential use is for larger companies to gobble up smaller ones. Such uses have generated sparks on Capitol Hill, raising the possibility that lawmakers will seek to dictate what companies do with the dollars that taxpayers invest. In other words, that government investment could soon become the leverage that Washington uses to dictate dividend payments, investments, and other capital-allocation decisions made by participating financial institutions.

In the meantime, insurers and other troubled financial institutions are seeking access to the money to use as they see fit. These include GMAC, the car-loan arm of General Motors, which announced last week that it was converting to a bank holding company in order to gain access to the TARP. The company already has tapped into one of the Federal Reserve’s new programs to help distressed lenders, so why not go further? As more industries line up at the trough, government dictates threaten to spread into more segments of the economy.

One encouraging sign of restraint came late last week, when the administration said it would not let General Motors tap the TARP for $10 billion to help finance its merger with another struggling U.S. automaker, Chrysler. But that may just be a temporary setback for the two car-makers, which reportedly will try to raise the money out of the $25 billion in low-interest loans Congress authorized for Detroit to produce more fuel-efficient vehicles. And undeterred by the administration’s stance on GM, auto parts manufacturers are now prodding Washington for a piece of the $700 billion. The supplicants’ logic is pretty sound -- if Washington is willing to keep big financial institutions afloat for fear of the spillover effects of their collapse, shouldn’t it also aid an automobile industry that employs hundreds of thousands? That’s the kind of question the current administration has teed up for the next one. Here’s hoping the guiding principle will be to intervene only when the market stops working, rather than using tax dollars to postpone the pain of a company’s failure.

* Photo of Treasury Secretary Henry Paulson by Haraz N. Ghanbari / AP