TARP Leftovers?
December 12th, 2009 . by economistmom
It’s kind of silly, the talk about using unspent TARP money to “fund” anything else outside of TARP. The TARP funds are borrowed money, and we’ve literally borrowed any of the TARP funds already spent. Any “remaining” TARP funds that are “tapped into” will just become additional amounts literally borrowed. Bruce Bartlett pointed this out among other troubling aspects of the talk about possible additional stimulus (emphasis added):
To be sure, the unemployment rate is likely to remain high for some time to come, and Congress may well wish to consider targeted policies to deal specifically with that problem. And, certainly, humanitarian measures such as extending unemployment insurance should be adopted. What should be avoided, however, are large-scale stimulus programs that cannot be justified on their own merits but only as the response to an emergency situation. That is especially true if the administration wants to use unspent funds from the Troubled Asset Relief Program (TARP) to fund additional stimulus without going through the normal appropriations process. It’s wrong to use such funds as “found money” that needs to be spent quickly lest it burn a hole in the government’s pocket.
All of the appropriated TARP “funds” were deficit financed; it’s simply a credit line. A household analogy would be if one had taken out a credit line specific to purchases from a particular furniture store and then believed that any unused portion of that credit line could finance the purchase of a car. The sad truth is you’d have to take out a new loan (for a car this time), and your actual indebtedness would (yes, unfortunately) actually rise.
And it’s also silly to think you could magically turn that unused portion of the furniture-store credit line into positive savings that would reduce your overall (and actual) debt, as today’s Washington Post seemed to suggest the Republicans believed they were voting for (emphasis added):
Democrats want to fund a portion of their jobs package with unspent money from the $700 billion Troubled Assets Relief Program. The Obama administration is also considering ways to funnel TARP money to help small businesses.
Before the House voted Friday to approve a bill that will change how financial firms are regulated, the chamber rejected a Republican-backed proposal to use unspent TARP funds to pay down the national debt. The measure failed by a vote of 232 to 190, with the vast majority of Democrats opposing it.
Republicans have signaled they will press this issue as part of a series of efforts to cast Democrats as spending too much. “House Democrats voted to continue TARP and go right on spending taxpayer dollars with reckless abandon,” said House Minority Leader John A. Boehner (R-Ohio).
So the TARP money isn’t a pot of saved money sitting there. It’s a credit line, and no matter how you label it, efforts to spend “leftover” TARP funds are efforts to actually increase the federal debt. That means the cost is far from “free” and so the benefits ought to be significantly greater than zero as well. Leftover TARP funds don’t give us an excuse to spend with reckless abandon.
It’s kind of amazing we even still call the thing “TARP”. Remember when the whole idea was that there was some kind of “liquidity crisis” and “market failure” and the real problem in the markets was only that banks couldn’t sell assets off their balance sheets at an “objectively fair” prices (so that the new market price was so depressed that the “mark to market” accounting rules unfairly made the banks “inaccurately” appear insolvent).
If you believed that narrative, then it might indeed have made sense to some to establish a, quote, “Troubled Assets Relief Program” to take these “toxic assets” off the books of the financial institutions as soon as possible, replace them with hard capital that would preserve the functioning of the system, and have the only organization in a position to hold the assets and wait it all out - the government - retain possession of the securities until the storm passed.
But instead of relieving troubles assets, the government evidently determined quite early on that the ambiguous crunch in “liquidity” and the “temporary market failure resulting from inaccurate valuation” weren’t actually the real problems. Instead, the underlying assets were overvalued, some deep correction in pricing was inevitable, and that many banks really were nearly technically insolvent and, if they were going to survive outside of bankruptcy reorganization, needed to be truly bailed out through recapitalization and explicit assurances to the marketplace of government backing. Also, the FED seemed to have its own plan for buying up all the bad mortgage based securities (of which it now owns nearly $1 Trillion worth while the banks have accumulated over $1.1 Trillion in “excess reserves”, the first time such reserves have been of anything but trivial value since the Great Depression).
And then there were the domestic auto manufactures, and then who knows what else because it’s hard to even keep track. From the original concept - to the recapitalizations - to the current revolving line of credit, all-purpose, unaccountable slush fund. How far we’ve come in only a little more than year!