Democrats Extend TARP to 2010: Obama Endorses Troubled Asset Fund to Finance Jobs Stimulus!

Skip MacLure's got the dramatic headline, "Underhanded! Democrats Extend TARP To 2010 – Election Slush Fund?" But Keith Hennessey's got the analysis, "The 'Using TARP Funds for Stimulus' Gimmick" (via Memeorandum):

Under current law it is not legally possible to “use” returned TARP funds for a new stimulus proposal. The Administration and its Congressional allies want to describe their proposal this way to make it appear that their new spending does not increase the federal deficit and debt. Even if the TARP law is changed, new government spending is just that, new government spending. No matter what optical gimmicks are created, new spending will increase the deficit and debt.

The TARP law allows up to $700 B to be used for any of several specific purposes:

• buying troubled assets from financial institutions; (§101)
• insuring troubled assets held by financial institutions; (§102)
• foreclosure mitigation efforts; (§109)
• direct assistance to homeowners; (§110)
• or buying or insuring any other financial asset that the Secretary of the Treasury and Fed Chairman agree “is necessary to promote financial market stability.” (§3(9)(B)).

The last bullet is the one we used for direct capital investments to large financial institutions (and auto manufacturers).

Unemployment benefits, COBRA subsidies, infrastructure spending, export subsidies, tax cuts, and a whole range of other stimulus ideas are not in this list. Under current law, TARP funds cannot be used for any of these purposes.

The Administration can legally use TARP funds to further subsidize credit for small businesses, through creative use of the above authorities.

Some (many) people are confused by another aspect of the TARP law. The $700 B acts as a revolving fund. The $700 B is a limit on how much can, in total, be spent at any one point in time, but only for the above purposes. In a silly extreme example, Treasury could buy $700 B of troubled assets from Bank A. Suppose the market went up, and those troubled assets were then worth $800 B. Treasury could sell those assets, and the debt held by the public would decline by $800 B. The way the law is written, Treasury could then buy up to another $700 B of troubled assets.

There is therefore no theoretical limit on the total amount of money over time that Treasury can spend for the above listed purposes. There are instead limits on how much can be spent at any one point in time, on how long that authority lasts for, and on how those funds can be spent.

RTWT, at the link.

RELATED: The Hill, "Treasury Extends TARP":

President Barack Obama on Tuesday threw his support behind using some TARP funds to pay for a new jobs bill designed to help small businesses, and Geithner said the improvements in the TARP’s performance put the government in a better position to address the economic and financial challenges faced by the country.

At the Wall Street Journal as well, "U.S. Extends TARP Until October 2010."

Cartoon Credit: Theo Spark.