The Baseline Scenario

What happened to the global economy and what we can do about it

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).

Written by Simon Johnson

January 15, 2009 at 4:49 pm

Posted in Commentary

«
»

5 Responses

Subscribe to comments with RSS.

  1. [...] This is what I’m talking about in my last post: 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. [...]

    TRUTH ON THE MARKET » More (less) on the costs of stimulus

    January 15, 2009 at 10:30 pm

  2. Enjoyed the WSJ article – thanks. For a less serious but same topic essay – see

    http://missmarketcrash.blogspot.com/2009/01/reframing-probability-dimension.html

    missmarketcrash

    January 16, 2009 at 5:24 am

  3. [...] very little to help the economy turn the corner. The new fiscal stimulus needs to be supported by a proper bank recapitalization program as well as by a large scale initiative on [...]

    RealTime Economic Issues Watch

    January 16, 2009 at 12:05 pm

  4. [...] little to help the economy turn the corner.  The new fiscal stimulus needs to be supported by a proper bank recapitalization program, as well as by a large scale initiative on [...]

    Bank of America Gets Quite a Deal « The Baseline Scenario

    January 16, 2009 at 2:26 pm

  5. [...] like an aggregator-type approach; this is quite consistent with the RTC-inspired structure that we have been advocating (see the WSJ.com article linked through that post for details; such ideas are consistent with and an [...]

    Designer Talk: Bank Recapitalization (and Bair’s Aggregator) « The Baseline Scenario

    January 17, 2009 at 10:14 am


Comments are closed.