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Bernanke: TARP is Not a $350 Billion Slush Fund

January 13, 2009 RSS Feed Print

Federal Reserve Chairman Ben Bernanke made it clear today that that the remaining $350 billion in TARP dough should be used to bolster the financial system -- not the Big Three automakers, the porn industry, the media or any other thing Congress feels like offering a hand to. This from Michael Feroli at JP Morgan Chase:

Bernanke concluded his talk with a cautionary word for the incoming administration: without stabilization of the financial system, do not expect fiscal stimulus to promote a lasting recovery. In addition to further capital injections, Bernanke proposed three ways TARP or other public funds could be used to support credit markets: (i) through direct purchases of troubled assets, as the TARP was originally conceived, (ii) asset guarantees for bank portfolios of assets, similar to what was done for Citi, and (iii) the creation of bad banks to take distressed assets off other banks' balance sheets.

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There may be some benefit in stabilizing certain institutions (although it is doubtful that investors should be protected) but simply moving money for the sake of moving money does nothing good.
I don't see how this money provides a stimulus.
It seems that people have the strange idea that this money comes from later generations, but it doesn't. In order to spend at a deficit we borrow the money today--it comes out of the pockets of today's lenders. All of the money that is going into this deficit spending is being borrowed, and thus is coming at the expense of money that would otherwise be invested at a lower risk-adjusted rate of return (i.e. cheaper money). That is, the money that is going into the stimulus likely has the effect of drying up sources of capital and credit.
The harm comes from the transfer of wealth from more productive uses to less productive uses, and that happens today, we aren't taking the money from our children. The harm to our children is that it subjects them to yet another wealth transfer. It is the opposite of stimulus.

Mazzula of VA 5:33PM January 13, 2009

Bernanke: TARP is Not a $350 Billion Slush Fund

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