Sunday, March 14, 2010

A Better use of TARP Funds

TARP, the Troubled Asset Relief Program, was signed into law by President George W. Bush on October 3, 2008, to deal with the financial crisis. TARP allows the U.S. Department of the Treasury to purchase or insure up to $700 billion in “troubled” or “toxic” assets, defined as any securities or obligations based on or related to mortgages, and any other financial instrument that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines is necessary to promote financial market stability.

TARP is a “revolving purchase facility,” like a revolving loan fund, so that funds received by the Treasury when it sells previously purchased troubled assets go back into the pool to facilitate the purchase of more assets.

Subsequent amendments to TARP enable the president personally to spend money on any program he deems necessary to avert a financial crisis, which President Bush used to support the auto industry. TARP funds were chiefly used to purchase bank equity shares and shares of AIG.

Bad loans and securities are only one form of toxic asset. Labor is a much larger component of the economy than financial instruments. Indeed, dead wood in the labor force is probably the largest troubled asset in the economy. A better use of TARP would be to retire labor force participants whose value added is less than the value of their marginal output, thereby reducing value subtraction in the economy. Ditto for the public school systems of central cities, tertiary institutions, government bureaucracies, etc.

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