Some Questions about TARP’s Future

As I discussed the other day, using TARP to pay for new jobs programs faces some serious practical issues. First, the administration is limited in how it can deploy existing TARP funds. It should be straightforward to use more funds to support lending to small businesses (which TARP already does to some extent), but it would take great legal ingenuity to use it to fund infrastructure projects or aid to state and local governments.  Indeed, in an article titled “Use of Cash from TARP Hits Hurdle“, the Wall Street Journal reports that top Democrats have concluded that TARP money can’t be used for either of those ideas.

Second, legislative use of TARP money are limited by budget scoring rules, which currently would attribute only 50 cents of budget savings to each dollar by which TARP’s authority might be reduced. And even then, careful budgeteers would realize that such savings are make-believe if, as seems likely, any such limits would apply only to TARP authority that was unlikely to be used anyway.

In short, the rhetoric about using TARP to finance various proposals seems to have gotten ahead of reality.

The President’s speech at the Brookings Institution today provided some additional insight into the Administration’s plans for TARP, but some important questions still remain.

Here are the President’s three forward-looking statements about TARP (he also made some comments about TARP’s origin and history, but that’s a topic for another day):

I’m asking my Treasury Secretary to continue mobilizing the remaining TARP funds to facilitate lending to small businesses. …

[W]ith a fiscal crisis to match our economic crisis, we also must be prudent about how we fund [initiatives to accelerate the pace of private hiring].  So to help support these efforts, we are going to wind down the Troubled Asset Relief Program — or TARP — the fund created to stabilize the financial system so banks would lend again. …

TARP is expected to cost the taxpayers at least $200 billion less than what was anticipated just this past summer.  And the assistance to banks, once thought to cost taxpayers untold billions, is on track to actually reap billions in profits for the taxpaying public.  So this gives us a chance to pay down the deficit faster than we thought possible and to shift funds that would have gone to help the banks on Wall Street to help create jobs on Main Street.

If I am reading that right, the President would like to (a) continue Treasury’s existing effort to support small business lending through TARP, (b) wind down the TARP program, and (c) shift funds to other purposes. That leaves me with some important questions, including:

• Does the administration plan to expand TARP’s small business lending support or just execute the one that’s already been announced? (NB: The President also endorsed several other steps to help small businesses, including easier access to SBA loans.)

• Does “wind down the TARP program” mean that Secretary Geithner won’t use his authority to extend the program beyond December 31, 2009? If I were him I would sleep much better at night if I had some “dry powder” in an extended TARP, just in case we have another September-October of 2008. Such a replay seems highly unlikely (knock on wood), but if that exceedingly remote event did happen, I wouldn’t want to be the Treasury Secretary who went up to Capitol Hill to ask for a TARP II.