The Funding for Recapitalization

Congress is now debating how to use the second half of the TARP.  I suggest that all $350bn should be used for bank (and other regulated financial institution) recapitalization, providing this is done in a comprehensive manner (the details of this argument are now on WSJ.com).  And I suspect that an additional budget authorization, beyond TARP, in the region of $250bn will be needed for the same purpose.  If Congress sets up a Resolution Trust Corporation (RTC)-type structure, then this RTC can borrow additional money from the Fed as needed.

The important point is to keep this funding for bank recapitalization separate from the fiscal stimulus.  We can continue to debate the size and nature of the stimulus, of course, but roughly $800bn seems right and the mix of spending and tax cuts currently proposed also makes sense.  (On the point of whether the tax cuts would be “wasted” in any sense, remember that consumers have damaged balance sheets and that tax cuts should help on that dimension.)

Bank recapitalization should therefore be seen as complementary to the fiscal stimulus, rather than as any kind of substitute.  We need both to be big and bold (and of course we also need a serious housing refinance program that would directly reduce foreclosures).


Originally published at the Baseline Scenario and reproduced here with the author’s permission.

One Response to "The Funding for Recapitalization"

  1. Ignob   January 16, 2009 at 1:10 pm

    The banks have defrauded the people and are now insolvent. So now the people should bail them out? I don’t think so.