Three Problems With Using TARP to Pay for New Spending

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Congressional leaders are excited about the possibility of using unspent money from the Troubled Asset Relief Program to help pay for additional spending that would encourage job creation and provide support for struggling families. However, they face three challenges in using TARP money for such programs.
 
First, each dollar of redirected TARP money generates only 50 cents in budget savings. Why? Because TARP accounting is done using a “credit” approach, which accounts not only for the money that the government would use to purchase troubled assets, but also expectations of any money that would subsequently be returned.
 
The potential for returns varies greatly among the existing TARP programs. On average, the investments in banks seem likely to return most of the original investment, so the net cost of those investments will be relatively small. At the other extreme, the program supporting mortgage modifications will generate no returns. In scoring possible changes to TARP, CBO splits the difference and assumes that, on average, 50 cents of each TARP dollar will be repaid, and 50 cents will be added to the deficit.
 
For each $1 billion in new spending that it wants to pay for, Congress will thus have to cut TARP authority by $2 billion.
 
Second, the alleged “savings” from cutting TARP aren’t real. Why? Because Treasury is not planning to use all of its existing TARP authority. In his letter to Congressional leaders last Wednesday, Treasury Secretary Geithner predicted that the maximum draw on TARP would be $550 billion out of the $699 billion currently authorized. That leaves $149 billion in TARP resources that will likely never be used. Reducing existing TARP authority by, say, $50 billion would thus have no effect on TARP operations, federal spending, or the deficit.
 
Such a reduction would, however, generate budget “savings” within the congressional budget process. Under congressional budget rules, the Congressional Budget Office is required to score reductions in TARP authority relative to the budget baseline developed back in March. That was during the depths of the financial crisis so CBO assumed that all TARP authority would eventually be used. Conditions have since improved, and that assumption is no longer realistic. But it is still used in congressional scoring.

The “savings” attributed to TARP reductions today thus exist because the financial world has improved, not because such reductions would actually result in real budget savings. CBO itself recently highlighted this issue in its cost estimate for the House financial reform bill, which uses $20.8 billion in TARP rescissions to pay for $10.4 billion in new spending. CBO says (in its measured tones):

That reduction in spending [in TARP] relative to the March baseline might occur even in the absence of this legislation because financial conditions have improved considerably since March. Indeed, the Secretary of the Treasury noted in his December 9, 2009, letter to the Congress that “beyond these limited new commitments, we will not use remaining [TARP] funds unless necessary to respond to an immediate and substantial threat to the economy stemming from financial instability.” Thus, if CBO were to estimate the impact of the TARP provision in this legislation taking into account current financial conditions, the agency would not expect that the TARP’s ceiling on outstanding investment would be fully utilized. Therefore, the savings estimated relative to the budget resolution baseline may be attributable to the improvement in financial conditions rather than enactment of H.R. 4173.

Third, when Congress created TARP, it specified that future TARP rescissions should not be used to pay for new spending. Section 204 of the Emergency Economic Stabilization Act indicates that the costs of TARP were being incurred because of an emergency (and therefore were exempt from certain congressional budget requirements) and that “rescissions of any amounts provided in this Act shall not be counted for purposes of budget enforcement.” In other words, Congress wanted to make sure that the emergency spending in TARP wouldn’t subsequently be rescinded to pay for new, non-emergency spending.
 
That limitation has not been a factor thus far when Congress has used TARP rescissions to pay for new legislation. In the spring, Congress used a $1.26 billion TARP rescission to help pay for legislation to help struggling homeowners. A few weeks ago, the House used a $34 million TARP rescission to pay for a new TARP database. In both cases, the resulting budget savings were relatively small ($630 million and $17 million, respectively) and were used to pay for programs related to TARP’s goals (housing and transparency). Looking ahead, a key question is whether Section 204 will play a bigger role now that Congress is considering larger TARP rescissions that would be used to fund programs well outside TARP’s scope.
 
Donald B. Marron is a visiting professor at the Georgetown Public Policy Institute and writes about economics and finance at dmarron.com. He previously served as a member of the Council of Economic Advisers and as acting director of the Congressional Budget Office.