A clue

While this particular set of circumstances is playing out in the United States the theory applies to any country anywhere in which the government has/is injecting itself into the private sector under the guise of assistance.

Stuart Varney reports:

Here's a true story first reported by my Fox News colleague Andrew Napolitano (with the names and some details obscured to prevent retaliation). Under the Bush team a prominent and profitable bank, under threat of a damaging public audit, was forced to accept less than $1 billion of TARP money. The government insisted on buying a new class of preferred stock which gave it a tiny, minority position. The money flowed to the bank. Arguably, back then, the Bush administration was acting for purely economic reasons. It wanted to recapitalize the banks to halt a financial panic.

Fast forward to today, and that same bank is begging to give the money back. The chairman offers to write a check, now, with interest. He's been sitting on the cash for months and has felt the dead hand of government threatening to run his business and dictate pay scales. He sees the writing on the wall and he wants out. But the Obama team says no, since unlike the smaller banks that gave their TARP money back, this bank is far more prominent. The bank has also been threatened with "adverse" consequences if its chairman persists. That's politics talking, not economics.

So what is happening here? Mr. Varney provides a partial answer:

My answer: The government wants to control the banks, just as it now controls GM and Chrysler, and will surely control the health industry in the not-too-distant future. Keeping them TARP-stuffed is the key to control. And for this intensely political president, mere influence is not enough. The White House wants to tell 'em what to do. Control. Direct. Command.

This is indeed true. But what else? An educated guess informs that those in control will want to make those banks holding TARP funds as absolutely uncomfortable as possible in a bid to get the very same banks to agree to any terms in order to disgorge the TARP funds. Mr. Varney rightly suggests these may come in the form of compensation caps, changed lending practices, etc. True, but this brings us back to our largely unanswered question from the other day:

What happens to the TARP funds once repaid by the banks to the government?

One can easily imagine a scenario under which the banks get the screws put to them so tightly that they will not only subscribe to the terms above but also the creation of some new, and permanent, set of governmental programmes which dole out the repaid TARP funds, or a big enough portion of them, for all kinds of social re-engineering programmes. The governmentalist mindset will think, "We created this new money, why waste it by simply closing out the TARP programme?"

The banks of course will line up squealing with praise for these new programmes and the need to use these repaid TARP funds for the "better social good". And why wouldn't they line up to do so, they will have repaid the TARP funds and removed the government substantially off their backs. The fact that some new social re-engineering programmes have been created and foisted onto the tax-payer in perpetuity makes no difference to the banks, they got rid of their problem. The same rationale goes for healthcare "reform" as well. Businesses with large healthcare costs will equally praise any governmentally run programme (paid for, of course, by the tax-payer) which removes a huge cost off their books. When you hear some phrase such as "social betterment" you should smell money.

So, asked again:

As financial institutions (and non) in the US begin to pay their TARP funds back, where will those funds go? These funds were conjured last year and injected into these firms, to be paid back with interest. Will the repaid funds merely zero out the conjured funds leaving only the interest bit to go into the general funding of the US government?

Or, will these repaid funds (in toto, principal and interest) become "real" and permanent funds going into the general funding of the US government and doled out forever?

Mr. Varney has graciously provided another clue. As a side note, shed no tears for the big business/banking community. For years that class has hedged their bets and only given lip-service to offering resistance to more and more government and higher and higher taxes. Perhaps now they are learning their lesson as to what happens when you do not stand up for free markets and capitalism in a legitimate and strong fashion.