Well that was quick. This morning Treasury Secretary Geithner laid out the administration’s vision for TARP, answering the questions I posed yesterday.
As expected, Secretary Geithner is using his authority to extend the TARP program to October 3, 2010 (it otherwise would have expired at the end of this month). As I’ve suggested in earlier posts, I don’t see how he could have chosen otherwise. The administration is committed to programs that aren’t complete yet, and it needs to worry about unpleasant surprises. In the words of his letter to House Speaker Pelosi:
This extension is necessary to assist American families and stabilize financial markets because it will, among other things, enable us to continue to implement programs that address housing markets and the needs of small businesses, and to maintain the capacity to respond to unforeseen threats.
Second, Geithner announced that henceforth TARP will be used for only four programs: to mitigate home foreclosures, provide capital to small and community banks, additional efforts to facilitate small business lending, and, possibly, to expand the TALF program that supports securitization markets for loans to small businesses, commercial real estate, etc. Notably (and correctly) absent from this list are some of the ideas — funding for new infrastructure, assistance to state and local governments — that have been floated in recent days.
Geithner is right to draw a moat around TARP and to limit its use to specific activities, except in emergencies:
Beyond these limited new commitments, we will not use remaining EESA funds unless necessary to respond to an immediate and substantial threat to the economy stemming from financial instability.
Third, Geithner provided a new forecast of how much TARP money will eventually be used:
While we are extending the $700 billion program, we do not expect to deploy more than $550 billion. We also expect up to $175 billion in repayments by the end of next year, and substantial additional repayments thereafter. The combination of the reduced scale of TARP commitments and substantial repayments should allow us to commit significant resources to pay down the federal debt over time and slow its growth rate.
In short, the administration believes that at least $150 billion of TARP money will never be used. That’s great news. But now attention will turn to Congress to see whether it tries to use that $150 billion to “pay for” new initiatives. As I noted the other day, current budget rules would give Congress credit for 50 cents of savings for each dollar that’s removed from overall TARP authority. But such savings are an accounting fiction, not real, if the TARP authority never would have been used anyway.