There are legitimate reasons to criticize the management of the first half of a $700-billion economic bailout approved by Congress last fall, from the lack of transparency to abrupt changes in the way the money was spent. But Congress should not respond by withholding approval of the second installment. It should work with President-elect Barack Obama to refine the rules and quickly release the next $350-billion to prop up the still-fragile banking system and avoid an unnecessary showdown with the new administration.
Frustration with the Troubled Asset Relief Program understandably runs high in Washington and on Main Street. Banks that received TARP money have not shared with the public how they have used the cash, and credit remains awfully tight for both businesses and consumers. The program's mission also changed in midstream. Instead of buying troubled mortgage-backed securities from financial institutions, Treasury Secretary Henry Paulson decided it would be more prudent to send the money directly to banks in return for preferred shares. Money also was used to bail out insurance company AIG and two automakers, General Motors and Chrysler. While each of those decisions were defensible, they eroded support for the program that was tenuous at best.
But it is important to keep these shortcomings in perspective. The bailout was approved only after dire warnings that the entire financial system was on the verge of collapse. The goal was to prevent that from happening, not stop the flood of home foreclosures. While the situation is still grave, no major banks have failed since September and the credit market is not entirely frozen. There has been a positive impact, and Congress must allow Obama access to the next $350-billion installment and the flexibility to use it for maximum benefit. As Citigroup's dismantling reflects, there remains an urgent need to inject more capital into a banking system still reeling from billions in losses — and at this point that capital is only going to come from taxpayers.
Obama has pledged to require greater transparency from banks that receive money and ensure it is not used to enrich shareholders or bank executives. He also promises to assist smaller community banks as well as the larger financial institutions. House Financial Services Chairman Barney Frank's proposal to use part of the second installment to prevent home foreclosures may be worth pursuing, but the emphasis of the TARP program should continue to be shoring up banks and loosening credit markets.
To underscore the importance of releasing the money, Obama has promised to veto any legislation that prevents him from accessing the cash. That should not be necessary. Congress and the new president will face tougher decisions than this one, including working out the details of a far larger stimulus package. It is important that Obama has every tool available to limit the damage of this deepening recession, and he should have the opportunity to use the second installment of TARP and make the program more transparent and accountable.