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| Authors: | Martin N. Baily, Brookings Institution Charles L. Schultze |
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January 15, 2009
Last week, a five-member congressional oversight panel harshly criticized how the U.S. Treasury has so far spent the first $350 billion tranche of the Troubled Asset Relief Program (TARP). The bulk of that money has been used to inject capital into a wide range of potentially viable but ailing banks, giving the government an ownership share in return for these funds. The panel had several complaints about the way TARP has been run, but its basic criticism -- widely held among members of Congress and the public -- was that the Treasury has not required the banks to use the money for increasing loans to business and consumer borrowers.
These findings have strengthened a growing interest in Congress to condition approval of the program's remaining $350 billion on a mandate that the Treasury not only track the funds but also require that they be used primarily to make new Main Street loans -- to support homeowners facing mortgage defaults, struggling municipalities and other troubled segments of the economy.
The criticisms behind this sentiment are misguided. For one thing, the position of banks is dire, and lending is almost sure to contract even if TARP is fully successful. Furthermore, while "following the money" might seem like the right thing to do in terms of accountability and oversight of federal tax dollars, it is actually infeasible because bank loans typically cannot be traced to a particular source of funds -- banks get their money for loans from a variety of sources, such as borrowing from other financial institutions and government or through private injections of new capital.
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