The Bush Administration’s disclosure that the Treasury Department had already transferred $5 billion in Troubled Asset Relief Program money to GMAC, and that another $1 billion had been promised to GM directly, represents a significant turning point in US economic policy.

TARP has now been used, not just to restore market function as originally advertised, not just to prop up industrial companies contrary to original advertisement, but now to prop up an individual financial company just because it was in trouble and not because its demise posed a greater threat to the financial system.

Even worse: This is a use of TARP funds to prop up an individual financial company so it can buy off bondholders in order to restructure itself for the sole purpose of tapping Fed funding. It’s one thing to tolerate some regulatory arbitrage and rent-seeking. It’s another to encourage and subsidize them.

On November 16th President Bush said: “I’ve abandoned free-market principles to save the free-market system.” This GMAC/TARP maneuver officially marks a full embrace of industrial policy by the economic agencies of the federal government.