Senate conservatives last week waged a hard-fought and principled battle to protect both U.S. taxpayers and the integrity of the free market against the Washington establishment that favored a government bailout of General Motors and Chrysler. By late Thursday it appeared they had won. But within hours of the end of negotiations in the Senate, the White House undercut conservatives by announcing it would consider using taxpayer money from the Troubled Assets Relief Program (TARP) to bailout the Detroit automakers. Sadly, this wasn’t the first time the White House felt entitled to use TARP funds in a manner inconsistent with how the program was sold to the American people. TARP has morphed into political slush fund and now is the time to end this program by canceling further Treasury authority to allocate funds.

Even assuming the the purest of motives and perfect application, the justification for TARP was always precarious at best. As a cardinal principle, the federal government should not intervene to save firms from the consequences of bad business decisions. But in rare cases, a second principle comes into play: When the basic functioning of a market is breaking down, with potentially disastrous consequences for the entire economy, there can be a case for government to act to help restore a functioning market. The accelerating turmoil in the financial markets in the early fall, with the prospect of the entire credit system seizing up and a spiraling economic collapse, provided an urgent case to apply the second principle.

At that time, it appeared the critical step was for the U.S. Treasury to purchase “toxic assets” (consisting of mortgage-backed securities of uncertain value) so that credit markets could function smoothly again. TARP was created to address this necessity. Treasury has since concluded that the purchase of toxic assets is no longer practical and has embarked on a troubling pattern of potentially harmful ad hoc policymaking and mission creep. A major example of this was Treasury Secretary Henry Paulson’s announcement on Nov. 12 to suspend the original purpose of TARP and to use flexibility granted under the law to explore a wide range of alternative uses of the funds, from guaranteeing securities backed by student loans and credit card debt to using TARP to refinance problem mortgages. This step confused markets, reintroduced uncertainty into the pricing of mortgage-backed securities, and triggered a lobbying frenzy for ever-more “flexible” uses of the TARP funds.

The only way to prevent further misuse of the program is to end it. Congress should not only say “no” to any request to use the second half of TARP funds, but it should repeal TARP entirely. Specifically, the authority to spend the second $350 billion of TARP funds, and any remaining uncommitted funds from the program’s first $350 billion, should be revoked. Huge dangers still remain in the financial markets, but the Federal Reserve has sufficient existing powers to address short-term dislocation in the financial system. Congress should also investigate the origins of the crisis, including the role of private entities like the credit rating agencies as well as the role of government institutions like the Fed, the Securities and Exchange Commission, Fannie Mae and Freddie Mac. Government will always have a role ensuring a free market system, but TARP is hurting, not helping, that cause. It must be eliminated.

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