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Another TARP Spending Idea and Keynesian Economics

February 20, 2010

Adam Fowler for Adam Fowler’s Opinion Blog:

Will the federal government ever run out of TARP money? Thelatest proposal is to use $1.5 billion from that seemingly never-ending slush fund to prop up the mortgages of homeowners who either are unemployed or owe more on their house than it is worth. The money will be targeted to the five states which have seen the most dramatic (percentage-wise) decrease in home values: Arizona, California, Florida, Michigan and Nevada.

Earlier this month, President Obamaproposed using $30 billion in funds paid back to TARP by banks to encourage “community” banks to lend to “small” businesses. A key point to remember is that all of these endless funds politicians seem to always find to spend represent money that the federal government doesn’t in fact have (given the massive federal debt). Basic economics, however, tells us that it has to come from somewhere. It will eventually be paid for through more inflationary money printing, increased debt or higher taxes — none of which are good for an economy in need of recovery.

The Keynesians will tell you that this amount of spending is necessary to “stimulate” the economy. They argue that when private-sector spending is down during an economic recession, the government has to step in and spend money to revitalize the economy. One basic problem with that logic: The money government spends has to come from the private sector through one way or another — either through borrowing, taxing or devaluing the currency through money printing. [More]

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