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Should Banks Be Allowed to Repay TARP Funds?

Felix Salmon makes the case for allowing the banks to repay the TARP funds. And it's convincing. "If Treasury needs new firepower to rescue banks in real trouble, then — given Congressional opposition to any new bailout bill — the only way to get the necessary funds will be to use money already in the TARP account. Since the TARP is pretty much all spent by now, Treasury has little choice but to let JP Morgan et al replenish it." The banking system, in other words, has to pay for its bailout, or at least for its continued bailout.

The problem is, he also makes the case against letting banks repay the TARP funds. "TARP funds shouldn’t be repaid with the hope that the banks don’t need them any more," he writes, "they should be repaid only when the banks have demonstrated — with clear prices for their toxic assets — that they’re definitively in the clear." And they haven't done that. So they shouldn't be allowed to pay back their TARP funds.

All that said, I think Matthew Yglesias is probably right about this:

At the end of the day, the valuable thing that systematically significant institutions got from TARP was not so much the TARP money as investors and creditors’ knowledge that money would be provided in the future if necessary to prevent bank failures. That’s something the banks can’t “give back” nor can the government “take it away.” All we can do is try to set rules that make some sense out of the time-consistency issue that’s now been revealed to exist.

By Ezra Klein  |  June 9, 2009; 12:20 PM ET
Categories:  Financial Crisis , Solutions  
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Isn't there an inherent conflict between the point that the administration can not get any more funds from Congress to bail out the banks and the markets assuming that whatever happens the banks will be bailed out?

Posted by: seerrees | June 9, 2009 6:25 PM | Report abuse

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