Tuesday, January 20, 2009

They Better Use This $350 Billion Better Than The Last $350 Billion

Many people are bitter about the way the first $350 billion in TARP funds was used. Some feel that Paulson flat out lied and deceived them. The money wasn't used for what he said it was going to be used for, and now it appears as if we have little if anything to show for it. So why do we want to give them another $350 billion to waste? Mark Thoma takes a look at a recent article by John Berry which looks to address this very question in his blog post below.

John Berry isn't sure that politicians will be willing to provide additional help if the $700 billion in TARP money falls short of what is needed to stabilize the banking system:

Bernanke Tells It Like It Is, Some Don’t Listen, by John M. Berry, Commentary, Bloomberg: This may be as close as we’re going to get to a Fed chairman labeling some in Congress as irresponsible.

Sure, Federal Reserve Chairman Ben S. Bernanke was typically careful with his wording in a Jan. 13 speech in London. ... After explaining how the world economy “is critically dependent on the free flow of credit,” Bernanke issued his challenge: “Responsible policy makers must therefore do what they can to communicate to their constituencies why financial stabilization is essential for economic recovery and is therefore in the broader public interest.”

Three days after that speech, 33 of 39 Republican senators ignored Bernanke’s warning and voted against releasing the remaining $350 billion in Troubled Asset Relief Program money. (So did eight Democrats...) Fortunately, that left enough supporters, mostly Democrats, to clear the release of the much-needed money.

Too many senators shrugged their shoulders at Bernanke’s wise words. OK, perhaps they didn’t like the way Treasury Secretary Henry Paulson had jerked them around... Or maybe they didn’t like something else about the program.

And of course many of their constituents, who have their own financial and job worries as the economy falls deeper into recession, indeed are furious that banks that created the crisis are getting help when it seems ordinary people aren’t.

They aren’t going to be any happier... In all probability, $700 billion won’t be enough. ... At some point, politicians are going to have to stop pandering to their constituents and show leadership by explaining why the economy can’t survive without a banking system.

If more is needed, they are going to have to do more than that, this time they need to articulate a plan that makes sense. Because if they are going to do what Paulson did with the first round and never really explain how the plan is supposed to work, jump back and forth between plans, say a plan are dead and then revive it - maybe - and act haphazardly when banks are in trouble so that nobody knows quite what to expect, then there are better uses for the money.

This post can also be viewed on economistsview.typepad.com.

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