What If You Only Had $350bn To Spend?

Larry Summers made a convincing case yesterday that Congress should release the remaining $350bn of the TARP.  It’s good to see the Obama team emphasizing themes beyond the fiscal stimulus, including banks and housing.  Stronger governance and greater transparency are timely commitments for this program, and who can object to limits on executive compensation in today’s environment?  Some Congressional debate makes sense and could be productive, but it’s hard to see this request being turned down.

Still, what exactly should the money be spent on?  I’m tempted to say: housing, because this continues to be a major unresolved problem that looms over both consumers and their balance sheets.  Unfortunately, however, the banks remain a greater priority.  The latest developments for both Citigroup and Bank of America suggest the banking situation is (again) seen by insiders as more desperate than we outsiders wished to believe.

The next round of bank recapitalization (again) needs to be big and bold, for example along the lines we have been suggesting for some time (but I’ll take another comprehensive plan, if you have one, with strong expected taxpayer value).  The problem today is that we just don’t know if any major bank is well capitalized; there are too many black boxes that may contain toxic assets.  At best, this is a brake on the positive effects that should come from the fiscal stimulus.  At worst, we still have a major system issue on our hands.

And there is no reason to think that $350bn is enough to handle this problem.  The original $700bn was obviously an arbitrarily chosen number, and the money has been spent so far in a rather unplanned manner.  What we do next should not be constrained by the fact that there is a check for $350bn waiting to be picked up.  We should design a systematic recapitalization program, figure out what it will cost, and get on with it.  My working assumption, based on the published analysis of the IMF regarding losses relative to private capital raising, is that $1trn – properly deployed – should do the trick.

Then we should get to work on housing (yes, this needs more money).

Originally published at Baseline Scenario and reproduced here with the author’s permission.

One Response to "What If You Only Had $350bn To Spend?"

  1. villager   January 13, 2009 at 9:10 am

    And, maybe the unemployed could be put to work digging for the buried treasure that will pay for what is outlined in the article!If there is no treasure, then the next budget allotment can be thrown into the hole and buried – at least there is value in the wages of the work. Someone, somewhere better start getting realistic about how much of taxpayers capability to contribute and borrow can be squandered. It is not limitless.