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Bank policy of necessity or calculation?

David Frum

TEXT OF STORY

BOB MOON: We began today talking about those much-anticipated stress test results from the nation's banks. That testing was one of the strings attached to the government's Troubled Asset Relief Program. But lately some financial giants have been questioning whether it's worth getting tangled up in those strings.

Goldman Sachs has raised billions of dollars this week, aiming to repay TARP funds. It would need government approval to give the money back, and it's not clear if or when that might come. Is the government's banking policy working? Well as commentator David Frum sees it, that depends on which one you're talking about.


DAVID FRUM: President Barack Obama has two bank policies. One policy is motivated by economic necessity. The other is motivated by political calculation. The two policies contradict each other. You'll never guess which one is prevailing.

Policy one -- the policy of necessity -- is aimed at getting banks lending again. To do that, the Obama administration has put federal money into banks'
hands to rebuild their capital bases. The amount a bank can safely lend is a function of the bank's capital.

Policy two -- the policy of calculation -- imposes all kinds of populist limits on the decision-making of subsidized banks. They have been told how much they may pay or bonus their executives.

This is reasonable enough in the case of true zombie banks like Citigroup. But the same rules are being applied to institutions like Goldman Sachs and Northern Trust, the largest bank in Illinois, that could have stabilized themselves without direct aid.

Northern Trust was pressured into canceling an annual golf tournament the government regarded as too lavish. Northern's mistake: inviting the band Earth, Wind, and Fire to perform. Shortly afterward, the band found a venue at which it was welcome: It performed at the White House for President Obama.

Chafing under policy two, the policy of calculation, some of those financial institutions -- Goldman Sachs most notably -- are talking about repaying their TARP funds.

The Obama administration is resisting. The administration fears that premature repayment of federal money would shrink the banks' capital bases, and reduce their ability to lend, threatening the recovery. So the government is sending a double message to banks: We want you to keep government funds, whether you need them or not. And we want to use those government funds as a justification for dictating to you, whether you asked for them or not.

Agreed: some institutions have provoked populist outrage by their own
irresponsible behavior. A little moral restraint would be welcome. But political restraint is not: The message that should be sent back to government is -- back off.

David Frum is a senior fellow at the American Enterprise Institute.

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