- The Washington Times - Tuesday, June 9, 2009

UPDATED:

President Obama on Tuesday asserted that the government has “turned a profit” with taxpayer bailout money now being repaid by large financial institutions, seeking for the second straight day to bolster public confidence in his handling of the economy.

Treasury Department officials announced that they were allowing 10 of the nation’s biggest banks to repay $68 billion in funds lent to them last fall at the height of the financial crisis through the $700 billion Troubled Asset Relief Program, or TARP.

“It is worth noting that in the first round of repayments from these companies, the government has actually turned a profit,” Mr. Obama said during an event at the White House promoting a move to tighten spending controls for the federal budget.

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The banks have paid $1.8 billion in dividends on the loans, which constitutes the profit heralded by Mr. Obama.

But the president also cautioned that the country “will not escape the worst financial crisis in decades without some losses to the taxpayers.”

But Mr. Obama’s remark reverberated beyond the $700 billion bailout to the broader debate about whether the federal government is the appropriate entity to be taking majority stakes in companies such as General Motors, following its giant automaker’s bankruptcy filing and attempts to rebuild its business lines.

The administration has faced questions over the federal government’s ability to manage private companies and the impact of government intervention in industries ranging from finance to health care.

The president addressed these doubts head-on.

“I’ve said repeatedly that I have no interest in managing the banking system or for that matter running auto companies or other private institutions. So today’s announcement is welcome news to me,” he said.

Treasury Secretary Timothy F. Geithner said the “repayments are an encouraging sign of financial repair, but we still have work to do.”

The Treasury did not announce which banks would be allowed to pay back the money, but institutions such as Goldman Sachs Inc., JPMorgan Chase & Co., and American Express Co. have made no secret for weeks that they wanted to repay their portion of TARP funds.

The institutions have grown uncomfortable with the prospect of government influence over business decisions, but until this week Mr. Geithner had indicated they would not be allowed to buy back warrants held by the Treasury until the government deemed it appropriate.

The president made his comments about TARP payments at a White House event to promote his call for legislation to require that Congress offset any new spending increases or tax cuts, in what is called Pay-As-You-Go, or PAYGO.

“Paying for what you spend is basic common sense. Perhaps that’s why, here in Washington, it has been so elusive,” Mr. Obama said, speaking to an audience of mostly conservative Democrat lawmakers in the East Room, many of them members of the “Blue Dog” coalition of fiscally conservative House Democrats.

Mr. Obama called the PAYGO rule “very simple.”

“Congress can only spend a dollar if it saves a dollar elsewhere,” he said.

But PAYGO has numerous loopholes and exceptions, in part due to the complexity of the federal budget. It applies only to mandatory spending programs and not to discretionary or optional spending.

Also, PAYGO cannot stop the natural growth of mandatory spending in the government’s biggest entitlement programs — Social Security, Medicaid and Medicare, said Brian Riedl, a budget expert at the conservative Heritage Foundation.

“All PAYGO says is that if you create a new entitlement, it has to be offset [with cuts]. But Social Security, Medicare, Medicaid and all other entitlements can continue growing on autopilot and nothing will stop that,” he said.

Congress in 2007 passed a rule instituting PAYGO rules but the Bush administration did not support legislation, which is more binding and enforceable.

“Now you have this support,” Mr. Obama said.

The PAYGO event followed the president’s effort on Monday to promote an “acceleration” of the $787 billion in stimulus spending, the same day that a new Gallup poll showed the public’s approval of Mr. Obama’s handling of the economy to be slipping.

Republicans reacted to the PAYGO announcement with incredulity.

“We’ve amassed more debt over the last five months than this country has amassed in the last 200 years. This Congress rammed through a $3.6 trillion budget. So for us to sit here and listen to the White House say that ‘we ought to be responsible, we ought to pay for what we’re doing’ I think lacks just a little bit of credibility,” said House Minority Whip Eric Cantor, Virginia Republican.

Mr. Obama said that the budget surplus in the late 1990s was in part because of the PAYGO rules in effect at the time, and that the current budget deficit, which is projected to hit $1.8 trillion this year, is due in part to the absence of PAYGO.

“It is no coincidence that this rule was in place when we moved from record deficits to record surpluses in the 1990s — and that when this rule was abandoned, we returned to record deficits that doubled the national debt,” he said.

But Mr. Riedl said that PAYGO has “never been enforced.”

In the budget fights of 1991-1992, he noted, “Congress and the President still added more than $700 billion to the budget deficit and simply canceled every single sequestration that would have enforced PAYGO.”