Hold your wallet — here is TARP 2

February 12, 2009

 Diana Furchtgott-Roth– Diana Furchtgott-Roth is a senior fellow at the Hudson Institute and former chief economist at the U.S. Department of Labor. The views expressed are her own. –

This week Treasury Secretary Tim Geithner unveiled a financial stabilization plan that could cost $2 trillion, in addition to the $790 billion that Congress plans to spend on economic stabilization. All this without any consultation with Congress.

That’s financial stability?

The Dow Jones Industrial average fell almost 400 points Tuesday on the news, and the Asian equity markets followed. This steep decline is symptomatic of the unease that permeates financial markets.

It’s not just the amount of money that is troubling. The markets were also distressed by a lack of detail, especially on how to deal with so-called toxic assets – loans with diminished and uncertain value. The previous Treasury secretary, Henry Paulson, proposed to buy toxic assets, then discovered the difficulties of pricing and so switched to purchases of banks’ preferred stock to infuse capital into the banks.

Geithner promised “to consult closely with Congress” as he moved forward, but Congress has not held hearings on implementing the program, even though it would leverage $1 trillion of Federal Reserve funds and close to that in private-sector funds. The public fears that the $2 trillion dollar bank bailout fund would be just throwing good money after bad.

Last October Congress allocated $700 billion to the Troubled Asset Relief Program. But TARP, with roughly half the funding disbursed, has not yet delivered on its promises. Then, on February 10, it was dĂ©jĂ  vu all over again. Geithner declared, “Our plan will help restart the flow of credit, clean up and strengthen our banks, and provide critical aid for homeowners and for small businesses.” He didn’t say how long it would take – because no one knows.

The Geithner plan is another version of TARP, but with more bells and whistles. Banks with assets over $100 billion would be subject to an intensive audit, to measure their capabilities. A Public-Private Investment Fund would purchase troubled assets, although how private money is to be mobilized was unclear.

Carnegie Mellon economics professor Allan Meltzer disagrees with Geithner’s approach. He proposes to allow banks access to government funds only if they can first raise an equivalent sum on their own. If not, it’s off to bankruptcy court they must go, with their competitors free to snap up any worthwhile assets at bargain prices.

The idea behind TARP was not new. Similar programs had successfully been put in place in the Asian banking crisis of the late 1990s. A government agency, a so-called “bad bank,” would buy the toxic assets, paying for them with fresh capital so that the banks could continue to function.

By definition, if the government is purchasing distressed assets it is paying more than the “market price,” more than a private buyer would pay.

Geithner might be better off admitting that these assets will have to be purchased by the Treasury at prices higher than market, and then going to Congress and the American people to make his case. He could say that this will be expensive, but will allow banks to clear underperforming assets off their balance sheet, enabling banks to start lending again. With revived credit markets, the economy can grow.

The implicit reason for going beyond Congress is: “Trust us, we know what we are doing.” Yet Geithner undermined that message by stating that all of this is uncharted territory and that mistakes would certainly be made. Neither the message nor the messenger reassures financial markets. Quite the opposite.

Indeed, Geithner and the Administration may have done what the Democratic leaders, Senator Harry Reid and Speaker Nancy Pelosi have consistently failed to do – make Congress appear to be the last best hope for responsible government in Washington.

Diana Furchtgott-Roth, dfr@hudson.org, is a senior fellow at the Hudson Institute and former chief economist at the U.S. Department of Labor.

42 comments

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The government would do well to truly listen to the people, all the people, because many are talking about taking their money out of the banks. The emails are going around, the attitude is that Washington D. C. is living in some type of Holy than Thou state, and has little concern for the people or what they think is best. We’re not all that ready to pay for the mistakes that were made in lending to those not capable of making payments, nor are we jumping up and down to let the politicians handle the mess they made by throwing the nation into a state of terminal debt. The government and the banks need to wake up and realize that there are still Americans that have to work to pay off these huge packages…we are the people that have been the backbone of this nation. We’re not economists, politicians, or groups charged with demoting or promoting racial and international peace, we’re just the working stiffs from every denomination, race, and nationality whose blue collars have kept the politicians living on cloud 9 while the rest of beat out a living the best we know how.

Posted by Donna | Report as abusive

I get tired of politictions telling me they know what I
need as I have never talked to them, what makes them so
sure they now my needs.
As for the banks, let those high rollers go bankrupt and
give the bailout money back to the taxpayer from whose
pocket they picked to began with.
I am on a fixed income and tired bailing out some one
who has gotten away with it.
If gov’t. wants to do something try triming the fat off
the hogs back instead of his ankles.