Treasury chief signals administration will renew TARP program

Officials fear a lack of liquidity could stall economic recovery.

Treasury Secretary Tim Geithner Thursday gave an upbeat prognosis about the effect the $700 billion Troubled Asset Relief Program has had in stabilizing the economy, but strongly indicated the administration will renew the program for another year to ensure financial markets do not backslide.

Geithner told the TARP Congressional Oversight Panel that the program passed by Congress last year in the midst of a credit crisis has settled the economy, buffeting many banks that have paid back more than $70 billion to the Treasury. He expects that another $50 billion will be repaid within 18 months.

"As we enter this new phase, we must begin winding down some of the extraordinary support we put in place for the financial system," Geithner told the five-member panel. He noted the administration has removed from its budget projections a proposed additional $750 billion stabilization fund as the economy has shown signs it could emerge from the recession. In addition, the Treasury's guarantee of money market mutual funds will end and the FDIC's program to guarantee senior debt has declined as the private sector has filled the void.

But Geithner strongly hinted the administration would renew the program, which is slated to expire on Dec. 31, because of fears that a lack of liquidity could stall a recovery. The law allows the Treasury secretary to extend TARP through Oct. 3, 2010 -- two years after former President George W. Bush signed the program into law.

"I think the classic mistake people make is they declare victory too soon; they put on the brakes too early; they withdraw these things and then the system has to go back and build more insurance against the risk of a bad outcome, and that could intensify the recession or reignite [it]," Geithner said.

The option to extend TARP is likely the only option the administration will have to use funds to bolster the economy after passage this year of a $787 billion stimulus package, which has triggered bailout fatigue among members of both parties. Republicans were incensed when the Bush and Obama administrations extended more than $76 billion to stave off collapses of General Motors Corp. and Chrysler LLC. The COP reported Wednesday that taxpayers are unlikely to recover the entire amount of funding loaned to the automakers.

"I think many Americans share a fear that I have that an emergency piece of legislation that was meant for economic stability has now morphed into essentially a $700 billion evolving bailout fund for the administration," said Rep. Jeb Hensarling, R-Texas, a member of the oversight panel. He noted that Obama said Wednesday in his speech to a joint session of Congress that the administration helped rescue the economy from the brink off a collapse. "If that is true, why do we need this TARP statute?" Hensarling said.

Geithner defended the program, saying the cost and availability of credit have improved, confidence in the financial system has been bolstered, and the risk to the system has dissipated. He also said the federal government has received on average of an 18 percent return on its TARP investments as banks repay the funds.

"So that argues, in a way, for ending the program" asked panel member Paul Atkins, a former SEC Commissioner.

Geithner said there was no science to solving the financial crisis.

"The art in this is, if you commit to do enough and you make that credible to people, you're not going to be behind, always chasing an escalating crisis, then you're more likely to solve it at lower cost. If you -- if you prematurely pull it back, you're going to live with too much risk. It's going to be more expensive in the future," Geithner said. "That's the basic central design of effective strategy in financial crises."