Federal Reserve chairman Ben Bernanke has said that he wants to get back to the basics when it comes to spending the remaining TARP funds. In a speech at the London School of Economics, he also said that to fix the economy, the financial and credit markets must first be repaired.

When TARP funds were first authorized as an economic rescue package, they were meant to facilitate lending and thaw credit markets. But $300 billion has been spent, and banks are still saddled with toxic mortgages and non-performing mortgage assets like repossessed houses. Mortgage rates are at record lows, but lenders remain reluctant to lend. In anticipation of new policy directives from President Obama, the Federal Reserve chairman says that the remaining TARP money needs to be spent on buying up toxic mortgages and getting them off the balance sheets of financial institutions.

Federal Reserve and toxic mortgages

During a recent speech in London, Bernanke told his audience, "Fiscal actions are unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system." He outlined ways in which the Federal Reserve plans to buy distressed assets such as toxic mortgages that currently have no buyers because they're either worthless, or too hard to accurately ascertain.

In doing so, he seemed to reverse his stance regarding TARP funds. He was one of the key players who originally helped convince Congress to authorize the TARP funds, saying that they needed to be used to buy toxic securities. But for the past several months, he has supported the spending of billions of TARP dollars in other ways that were not related to the purchasing of toxic mortgages.

The problem with TARP

Critics complain that the TARP program has become nothing more than an unregulated free-for-all, with companies viewing the money as a generous handout to help them get through a tough recession. Meanwhile, homeowners continue to default on loans, and hundreds of banks across the U.S. are in dire straits, overwhelmed by debt. The money that did go to banks from TARP was primarily used to plug holes in their balance sheets, but financial institutions still hold billions in toxic mortgage assets and aren't strong enough to engage in robust lending to the American public.

The Federal Reserve has already cut its key interest rates to zero, leaving it without one of its most powerful tools. To help the housing market recover, the Federal Reserve hopes to aggressively purchase longer-term securities issued by the Treasury. The rates on those instruments have a strong correlation with fixed mortgage rates, so that action-coupled with spending TARP funds to buy toxic mortgage assets-could potentially lower mortgage rates and stimulate lending. So far, nothing has stopped the deterioration of the economy, and now most Americans are looking to President Obama's stimulus plans for solutions that the TARP initiative have not yet provided.

Published on July 6, 2010