Obama Creating a Better TARP

In early-October, lawmakers passed an historic $700 billion financial bailout bill in a mad dash to avert a global financial meltdown. But now, the Secretary of the Treasury has said that he's leaving the mess in Obama's hands.

English writer G.K. Chesterton once said, "It isn't that they can't see the solution. It's that they can't see the problem." This may be the heart of the challenge for Barack Obama, who comes into the presidency tasked with devising an effective use for the $410 billion of funding that remains in the Troubled Asset Relief Program (TARP).

"Troubled" is the operative word

When they called it the Troubled Asset Relief Program, we assumed that they wanted to relieve troubled assets. As it turns out, the word "troubled" doesn't describe the assets-it describes the program.

In the final days of September, the world watched as U.S. lawmakers argued and negotiated over a proposed bailout plan for the U.S. financial services industry. When the first version of the legislation was denied, lawmakers loaded up a variation with irrelevant tax breaks to win votes. That strategy worked, and lawmakers rejoiced.

The American public was told that TARP funds would be used to buy mortgage-related securities from financial firms at a discount. This action would provide those firms with much-needed liquidity, and it would give taxpayers an income-earning asset that would eventually pay for itself.

Paulson backs down

Weeks later, Treasury Secretary Henry Paulson has allocated $290 billion of the TARP funds; $250 billion is dedicated to equity infusions at U.S. banks, and $40 billion will shore up AIG's balance sheet. Not one dime, however, has been allocated yet towards troubled assets.

On November 12, Paulson announced that TARP funds would not be used to purchase mortgage-related securities after all. He indicated that a more effective purpose would be to prop up the securitization market for auto loans, student loans, and credit cards. Five days later, he waffled again, stating that he didn't have any immediate plans to ask Congress for the rest of the money.

Obama steps up

The deployment of TARP's remaining $410 billion, then, appears to be in the hands of  Obama's new Treasury Secretary, Timothy Geithner, currently president of the New York Fed. Geithner has worked closely with Paulson throughout this crisis, and reports say he did not support the decision to let Lehman Brothers collapse.  

For the new Treasury Secretary, the first step will be to define the core problem of our economy. Paulson's inconsistent positioning would indicate that he just doesn't know; maybe it's mortgages or credit cards or auto loans or insufficient liquidity in the banks. Hopefully, the Obama appointee has the light to see in this financial darkness, so everyone can recover from this crisis and move on.