Tug-of-War Over How to Spend TARP Funds

Dec. 5, 2008 — -- There is a growing disagreement over how and whether to use the remaining $350 billion in the Congressional bailout bill.

Some economists fear the disputes could delay or disrupt action on the increasingly urgent economic meltdown.

"We may get some elements of gridlock until Jan. 20," said Martin Baily, former chairman of President Bill Clinton's Council of Economic Advisers, referring to the day President-elect Obama takes office.

With the financial markets already rattled, "This doesn't help," Baily said.

Citing the "pretty amazing" November job loss numbers that were announced today, the worst monthly figures since 1974, Baily added, "The way things are going, it would be good to do things as soon as possible."

But over the past few days, Obama, outgoing Treasury Secretary Henry Paulson and the leaders of Congress have all spelled out different priorities for the money.

Paulson has already spent or pledged nearly half of the $700 billion in the emergency fund dubbed TARP, for Troubled Asset Relief Program. Paulson initially said he intended to leave the second $350 billion for Obama to use in the long-running effort to stabilize the economy.

This week, however, Paulson indicated he may ask Congress to release the money to help recapitalize banks and to create a cheap mortgage program for people buying new homes. That money would not be available, however, to families in danger of losing their homes.

Obama on Wednesday said a priority for the TARP cash should be to stem the avalanche of foreclosures by helping homeowners already struggling with mortgages.

"The deteriorating assets in the financial markets are rooted in the deterioration of people being able to pay their mortgages and stay in their homes," Obama said. "We've got to start helping homeowners, in a serious way, prevent foreclosures."

President George W. Bush made clear today that his administration is keep its focus on financial institutions, rather than struggling homeowners.

"We are focusing on the root causes of the economic downturn in order to return our economy to health," the president said in a White House statement. "The most urgent issue facing the economy is the problem in the credit markets. Businesses and consumers need access to credit at affordable rates to spend an invest. And so we're working to stabilize the markets and make credit more affordable and available."

Senate Majority Leader Harry Reid, D-Nev., and House Speaker Nancy Pelosi, D-Calif., have demanded Bush spend a chunk of TARP to bail out Detroit's endangered car makers.

Bailout Fatigue in Congress

Republican members of Congress aren't sure the next $350 billion should be allocated at all.

"The government has burned through nearly $350 billion of funds and is pledging trillions of dollars more through other programs, yet little is understood about how these investments are contributing to the nation's economic recovery," 12 House Republicans, led by Minority Leader John Boehner, R-Ohio, wrote to Paulson earlier this week.

The growing bailout weariness in Congress may complicate fiscal recovery plans even after Obama takes office.

"Congress is pretty fed up," Baily said. "I don't know quite what they're going to do, but with momentum of a new administration, they'll probably get through a major package."

J.D. Foster, who was Bush's associated budget director, said he does not believe the contrasting priorities of the Bush and Obama teams are going to be a serious problem, but said "uncertainty is a problem generally" for financial markets.

"There is a great deal of uncertainty as to what President Obama and his team will do and they need to lay that out," Foster said. "At some point, the market will be helped with much more information from President Obama as to what he's going to do."

Foster, who is a fellow at the Heritage Institute, said that Obama may not yet know what he's going to do when he takes office because "he may not know what the state of the economy will be at the end of January."

At the moment, the financial markets are more worried about Paulson's next move, Foster said.

"The markets are more concerned about the next vagary from Secretary Paulson rather than a new administration that will take place six weeks hence," he said.

Foster complained that Paulson's shifting tactics have injected uncertainty into the nation's fiscal recovery plan.

Consistency into the next administration would help, he said.

"You have to let the financial markets heal. It's hard to heal when the doctor keeps changing the medicine every day," Foster said. "Sometimes you have to give them the antibiotics and let it work for a few days."