- The Washington Times - Wednesday, June 10, 2009

President Obama said Tuesday the bank bailout has so far been a pretty good deal because the federal government “turned a profit” of $1.8 billion in interest payments on the first set of bank loans that were repaid.

But the president warned that not all of the bailout will be so sweet, saying the country “will not escape the worst financial crisis in decades without losses to the taxpayers.”

For the second straight day, Mr. Obama sought to boost public confidence in his handling of the economy and bolster his argument that government intervention can work. He made the announcement a week after authorizing the government to take a majority stake in General Motors Corp.

Treasury Department officials said they are 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 as part of the $700 billion Troubled Asset Relief Program, or TARP. The banks have paid $1.8 billion in interest on the loans, which constitutes the profit promoted by Mr. Obama.

Mr. Obama spoke during an event at the White House touting a move to tighten spending controls on the federal budget. His preferred method: requiring Congress to offset some new spending with cuts or tax increases.

The president said the so-called pay-as-you-go rules would help ensure that a massive expansion of health care coverage - of the kind he is pressing this year - would not add to the deficit.

The $1.8 billion in profits were announced as the administration faces questions over its ability to manage private companies 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.

In response to the announcement, 20 House Republicans signed a letter to Treasury Secretary Timothy F. Geithner urging him to use the money to pay down the national debt.

“The American taxpayer deserves to be the first one repaid on this debt,” the letter said.

Still, one key Republican lawmaker, Sen. Judd Gregg of New Hampshire, the top Republican on the Senate Budget Committee, gave a positive endorsement of the move.

“Taxpayers should know that their government has accomplished what it set out to do in helping the financial system regain some of its footing lost last year, and further, that we are working to address and remedy the concerns over the rising federal debt,” said Mr. Gregg, who accepted the president’s nomination to be commerce secretary earlier this year before backing out, citing irreconcilable ideological differences with Mr. Obama.

The Treasury did not announce which banks would be allowed to pay back the money, but institutions such as Goldman Sachs Inc., JP Morgan 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.

Some analysts remain concerned the banking system is still weak and fear the gap between strong financial institutions and struggling ones will now widen.

With polls showing his handling of federal spending lagging, Mr. Obama also sought Tuesday to push Congress to adopt pay-as-you-go rules, or PAYGO, which would require new spending to be offset.

“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 Democratic lawmakers in the East Room, many of them members of the Blue Dog coalition of fiscally conservative House Democrats.

Paygo has numerous loopholes and exceptions, in part because of the complexity of the federal budget. It applies only to entitlement spending programs and not to discretionary programs Congress debates every year.

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.

The White House acknowledged as much, but the president’s budget director, Peter R. Orszag, said paygo will create “a sense of fiscal discipline” that will help ensure that programs like health care expansion, which is expected to cost more than $1 trillion, are offset by spending cuts or tax increases.

“I do strongly believe in the … broken window theory of budgeting,” Mr. Orszag said. “Just like broken windows have been shown to increase crime and harm outcomes, if you don’t have important constraints, including a basic principle that if you’re already got a hole you don’t dig it deeper, which is what paygo embodies, I think it leads to a sense that anything is possible in a fiscally irresponsible way and undermines a lot of what we’re trying to do.”

Mr. Orszag said that the Medicare Part D reform, which passed in 2003 and expanded coverage for prescription drugs for seniors, would have fallen under paygo rules. Mr. Obama, in a message to Congress, said paygo would also prevent new large tax cuts such as those passed in 2001 and 2003 under President George W. Bush.

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.

But Senate Finance Committee Chairman Max Baucus, Montana Democrat, said a law requiring paygo would “put the U.S. agriculture industry and Medicare program at risk of automatic benefit reduction if Congress does not meet the additional requirement.”

“Congress already has pay-go requirements in both the House and Senate,” said a Baucus aide.

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.

Sean Lengell contributed to this report.

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