Despite Secretary Geithner’s statement to the contrary, I still think the Administration is running out of room within the $700 B Troubled Assets Relief Program (TARP). In my last four posts on TARP funding (1 2 3 4), I have stuck to what I think I can demonstrate analytically. I am now going to shift to some educated guessing about what may be going on within the Administration that is contributing to confusion on the outside. The prior posts involved math, while now I am analyzing people, so I am far less certain about what you read here than when I walked through the TARP arithmetic.
I think the senior economic policymakers in the Administration are overconstrained and have several bad options in front of them. This is not an unusual situation, but to a certain extent they put themselves into this box by spending TARP money on every problem that popped up. $50 B on housing, $5 B on auto parts suppliers, $15 B on small business loans, additional unspecified sums for GM and Chrysler, and new as well as old mortgage-backed securities — things add up. I think they’re in a box.
The box has three sides:
- They have created expectations among various constituencies for programs announced over the past two months. These expectations would consume most of the remaining $700 B of TARP funds. If their new programs are successful, they will want to expand them to further strengthen financial institutions and markets. If they are unsuccessful, they will need more TARP funds to try something else.
- They are justifiably afraid of asking Congress for more TARP funds.
- They could create some room for themselves by taking taxpayer funds back from some of the healthy big banks, but they may be worried about the signals that sends about the others.
It appears that they are testing all three sides of this triangular box to figure out which is their least worst option.
Senior Administration policymakers are operating in an ever-changing financial, economic, and legislative environment. When they developed the President’s budget in February, asking Congress for more TARP funds probably seemed difficult but not necessarily impossible. In that circumstance, it was reasonable and responsible for them to put a $250 B placeholder in their budget for a potential future TARP request.
The legislative environment is now much more hostile. It would not surprise me […]