January 14, 2009 | WebMemo on Economy
More is not better. Efforts by Chairman Barney Frank (D-MA) of the House Financial Services Committee to "improve" the Treasury's Troubled Asset Relief Program (TARP) in the TARP Reform and Accountability Act of 2009 (H.R. 384) would unfortunately just make the program worse.Among other policy mistakes, it would explicitly approve the use of TARP to bail out the auto manufacturers as well as expanding the program into several other new areas.
Frank hopes that with his legislation, Congress will see fit to approve TARP's second $350 billion for use by the incoming Obama Administration. However, there is no good reason to approve the request for additional TARP funding under any foreseeable circumstances, and Frank's bill only adds more reasons for the additional funding request to be denied.
H.R. 384 is a compilation of responses to congressional criticisms of the TARP program, fixes to previous attempts to address housing foreclosures, attempts to revive housing sales, and various other miscellaneous provisions. A few of those provisions are good policy moves, such as making permanent the temporary increase in FDIC and NCUA deposit insurance coverage to $250,000. Unfortunately, most of the other provisions would only make matters worse.
Policy Errors in the Frank Legislation
Use the Fed for Future Crises
The financial market dangers that led to the TARP program, however, are far from over and could yet require additional governmental action. U.S. and international credit markets are still undergoing a wrenching restructuring and repricing of financial assets as markets adapt to the ending of excessive and risky borrowing. It is possible for another short-term crisis to once again cause financial markets to seize up.
However, the first line of defense against these dangers should be the Federal Reserve Board under its wide, existing powers--not TARP. While some of the Fed's actions in recent months have been disconcerting, it is still the most appropriate institution to address short-term dislocation in the financial system. The Fed is also insulated from the political and lobbying pressures that have caused TARP to range far and wide from its original purpose. As the Frank legislation demonstrates, TARP is seen as almost a slush fund that is available both to respond to real crises and to address politically sensitive areas. However, the Fed has the ability to only focus on real situations that require its intervention while also avoiding political pressure. Rather than adding still more money to this increasingly untargeted TARP, Congress should just rely on the Fed to address any future emergencies.
Time to End TARP
Regardless of valid criticisms about its day-to-day management and many specific efforts, TARP did achieve its short term purpose of heading off a financial catastrophe. However, as the Frank legislation shows, its future use will be as an increasingly unfocused and under-supervised fund to help politically active constituencies. It is time to lay TARP to rest and to move onto other more urgent priorities.
David C. John is Senior Research Fellow in Retirement Security and Financial Institutions in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.