Yesterday CRFB released a year-end review of the Troubled Asset Relief Program (TARP). Created on the heels of the financial crisis, TARP gave the Treasury the broad authority to spend up to $700 billion to promote financial market stability. CRFB has been tracking this spending on Stimulus.org, which is a detailed database of government actions taken to deal with the U.S. financial and economic crisis, including TARP.

The paper discusses how TARP has been used, its costs, effectiveness, and where we go from here. Additionally, it provides details on the purpose and costs of each program within TARP. Using information from Stimulus.org, CRFB reports in our paper that TARP has spent a net $386 billion and that although problems and risks remain, the $700 billion program is generally considered to have helped stabilize financial markets and the real economy. It states, however, that although TARP has helped to stabilize the financial sector, policymakers “must now work carefully to begin unwinding some support, shaking out moral hazard, and laying the ground work for future debt reduction. Failure to accomplish these goals could lead to a new crisis in the near future.”

The paper estimates TARP’s deficit impact to be about $167 billion so far, and goes on to say:

“Looking forward, the cost of future TARP spending will depend both on the types of spending undertaken (and their subsidy rates) and the total amount of the $700 billion program used. The CBO estimates TARP ultimately will spend about $600 billion for a cost of $242 billion. Secretary Geithner, this morning estimated the program would spend $550 billion at a final cost of about $140 billion.”

Below is a graph taken from the paper, showing all of TARP's investments since October 2008.

This paper adds to the growing list of policy papers and press releases CRFB has released to detail the government’s extraordinary actions taken during the financial crisis. Included in these are (click here for a full listing):

• Troubled Asset Relief Program: Year-End Review
• The Extraordinary Actions taken by the Federal Reserve to Address the Economic and Financial Crisis
• Taking Stock of the Fiscal Stimulus Package
• Analysis of the American Recovery and Reinvestment Act

With TARP set to continue for another year, CRFB will continue to track the program and all other government measures taken to support the economy at Stimulus.org.

There's an intriguing passage in the White House press release on President Obama's stimulus speech at Brookings yesterday: 

"An overall approach to fiscal discipline in the budget. Although additional resources are needed in the short-run to address the unemployment crisis, the Administration is committed to doing what we need to bring the medium-term deficit under control – and is exploring a range of steps to take as part of the FY2011 budget process..."

As we've urged ("CRFB Calls for Fiscal Recovery Plan"), the announcement of a medium-term fiscal consolidation plan, to be put into effect once the economy is on firmer footing, would send a powerful signal to our trade and financial partners, at home and around the world, that the United States is taking serious steps to put our fiscal house in order.

At a time when sovereign debtors are under great and increasing pressure (look at Greece, Spain, the U.K., and Dubai in the past week - to name a few), it is the time for the United States to step up and take a leadership role in restoring fiscal sanity to the world.

And the FY 2011 budget could be a powerful vehicle.

There’s a reason India Times just picked up David Lightman’s story “Rising debt threatens to derail Congress on just about everything.” The world knows the ever-growing federal debt is spiraling out of control.

The Dallas Morning News today also urged Congress to deal with the debt. If not addressed by Congress and the Administration, investors could lose confidence in the U.S. economy and Americans could be faced not only with a lower standard of living, but a real fiscal crisis.

Next Monday, a handful of the country’s most distinguished fiscal experts (if we say so ourselves) is offering a bipartisan proposal for lawmakers and the administration to tackle the debt. With the release of the Peterson-Pew Commission on Budget Reform’s first report – Red Ink Rising: A Call to Action to Stem the Mounting Federal Debt - Alice Rivlin, Bill Frenzel, Charlie Stenholm, Douglas Holtz-Eakin, Jim Nussle and Jim Jones will discuss how to avoid the tremendous global risks posed by the debt, while also taking precautions not to destabilize the still recovering economy. David Wessel is moderating this event which would not have happened without the support of The Pew Charitable Trusts and the Peter G. Peterson Foundation.

This morning, eleven freshman Senators introduced a series of health care reform amendments which they call the Value and Innovation Package (thanks New Health Dialogue for pointing this out). These amendments would be designed to strengthen the cost control measures in the current bill, with an eye toward bending the health care cost curve. Among the more promising amendments include:

• Pilot Testing Pay-for-Performance Program for Certain Medicare Providers. Directing the Secretary to begin pilot testing of value-based purchasing (pay-for-performance) programs for certain types of Medicare no later than January 1, 2016. These provider types include: inpatient psychiatric hospitals, long-term care hospitals, inpatient rehab facilities, acute prospective payment system-exempt cancer hospitals, and hospices. The Secretary would have authority, after 2018, to expand these pilots if the CMS Chief Actuary determines it would reduce Medicare program spending while maintaining or improving the quality of care.

• Revisions to National Pilot Program on Payment Bundling. Modifying the new CMS pilot on Medicare bundled payments created by the Patient Protection and Affordable Care Act. It would expand the number of health conditions tested under the pilot and give the Secretary authority to expand the duration or scope of the pilot after January 1, 2016 if the CMS Chief Actuary determines it would reduce Medicare program spending while maintaining or improving the quality of care.

• Improvements to the Medicare Shared Savings Program. Giving the Secretary greater flexibility in administering the Medicare Shared Savings Program. This program is created by the PPACA to reward Accountable Care Organizations (ACO) that successfully coordinate care to lower costs and improve the quality of care.

• Additional Improvements Under the Center for Medicare and Medicaid Innovation. Granting CMI additional flexibility in selecting models to be tested and permits the Secretary to give preference to models that would align Medicare and Medicaid spending with other public sector or private sector payer quality improvement efforts.

• Expansion of the Scope of the Independent Medicare Advisory Board. Requiring the Independent Medicare Advisory Board (IMAB) created under this Act to produce an annual report starting in 2014 that includes national and regional information on the cost, utilization, quality, and other features of health care paid for by private payers. IMAB also would be required to take the findings of these reports into account when preparing proposals to improve Medicare. IMAB also would, starting in 2015 and at least every two years after, submit recommendations to Congress and others on how to slow the growth in national health expenditures.

We hope to see more amendments like these, so that health reform really can be a means to slowing cost growth.

How and when the Fed will unwind the massive amounts of liquidity it has provided to shore up the financial system and economy?  Will the Fed be able to manage the unprecedented unwinding skillfully so that they successfully manage to steer a course between overtightening (which could slow growth) and undertightening (which could fuel inflation)?

To answer these questions, the latest term of art to be added to our financial crisis lexicon is: “triparty reverse repo operations”.

A reverse repo - or repurchase operation - is expected to be a key tool in the Fed’s withdrawal of liquidity. It occurs when the Fed sells an asset that had been held on its balance sheet. At the same time, the Fed agrees to buy it back at a later date at a certain price, which will increase Fed balances when the transaction takes place.

The NY Fed recently announced that it would start to test “triparty reverse repo operations” in the real world. A report in today’s press suggests that it is indeed testing these operations on a very small scale: the Fed has drained $180 million from the system through triparty reverse repo arrangements that settle tomorrow.

A recent interesting talk by NY Fed Trading Desk head Brian Sachs on the Fed’s balance sheet provides more insight about the Fed’s exit strategy, including:

• Many of the special facilities created by the Fed to provide liquidity are scheduled to expire February 1.

• Other tools to tighten policy – apart from raising the federal funds target rate and discount rate - are the Fed’s relatively new ability to pay interest on reserves; and its sales of longer-term security holdings (one of the traditional tools for tightening monetary policy).

• The total amount of credit extended has fallen from a peak level of $1.5 trillion late last year to around $160 billion today.

For further reading, see The Fiscal Roadmap Project’s paper, “The Extraordinary Actions Taken by the Federal Reserve”.

Earlier this year, the Administration launched a contest to let federal employees submit ideas to save the government money (at the time, we called this "A Gimmick We Like"). 38,000 suggestions later, the final four have been nominated -- and the public gets to vote on the winner. Among the nominees (by way of Peter Orszag) include:

• Make Social Security appointments online, from Christie Dickson of Alabama.
• Cut red tape in the way visitor fees and other funds from National Forests are deposited in the government’s bank account, from Julie Fosbender of West Virginia.
• Let veterans leaving VA hospitals keep the medications they’ve been using instead of throwing them away upon discharge, from Nancy Fichtner of Colorado. 
• Streamline redundant inspections of subsidized housing – saving inspectors’ time and taxpayers’ money, from Huston Prescott of Alaska.

Vote today, because the winner will be chosen on December 10th.

Here are the highlights from this weekend’s editorials on fiscal and budget policy:

• The New York Times applauded a CBO estimate that under the health care reform bill most Americans’ premiums would not increase. The Times also calls into question an insurance industry study claiming the opposite, that reform would cause premiums to rise.
• The Washington Post called regulation at the Federal Housing Authority long overdue. The new rules would impose stricter standards for both lenders and borrowers.
• The Wall Street Journal says claims that health care reform will bring down costs for employers are unsubstantiated. Business groups, including the Business Roundtable, should join the effort to stop the health care reform bill.
• Noting Friday’s somewhat encouraging unemployment report, The Washington Post says more stimulus targeted at the labor market might still be needed. But The Post also notes that much of the economic recovery will have to come from the private sector.

To sign up to receive a daily roundup of news clips on fiscal and budgetary matters, please contact lewisb@newamerica.net.

Today, the President's Economic Recovery Advisory Board (PERAB) was scheduled to release its recommendations on reforming the tax code. Although they have postponed their release until after the holidays, the need for comprehensive tax reform is no less urgent.

The current tax code is in many ways broken – it is inefficient, distorts behavior, stifles economic growth, and raises insufficient revenue to fund current or projected levels of government spending. It cannot be fixed in a piecemeal way. And given our dismal fiscal picture, reform will need to occur sooner rather than later.

The PERAB is expected to offer an almanac of options “relating to tax simplification, enforcement of existing tax laws and reform the corporate tax system without considering policies that would raise taxes on families making less than $250,000.”

There is no question that the tax code needs to be simplified, the tax gap closed, and the corporate tax system fixed. But while necessary, these reforms are not sufficient. As Congress debates tax reform, we believe they should also do the following:

• Make rational and deliberate decisions on the Bush Tax Cuts. At the end of next year, all of the 2001/2003 tax cuts are set to expire. They include lower marginal rates at every level, an expanded child tax credit, a new 10% bracket for lower-income earners, lower rates on capital gains and dividends, a phase-down of the estate tax, fewer “marriage penalties,” and several other provisions. Letting all of these cuts expire would probably be politically impossible, yet renewing them would cost roughly $2.3 trillion over the next decade, greatly worsening our already dreadful debt situation. Policymakers must think carefully and reach rational decisions as to which provisions should be allowed to expire, which should be renewed, and which should be modified – preferably in a more thoughtful manor than simply renewing them for everyone under a certain income threshold. And they should find a way to finance the costs of whatever they do renew.
• Enact a permanent AMT fix. The Alternative Minimum Tax (AMT) is a secondary tax system originally intended to capture higher-earning taxpayers whose tax liabilities were below a preset threshold; but because that threshold was never indexed for inflation, the AMT is now scheduled to hit an increasingly large number of upper-middle- and middle-income earners. In past years, Congress has taken action annually to prevent the AMT from hitting the middle-class by passing temporary “patches,” which do adjust the threshold for inflation. Changes should be made in a permanent manner instead. A popular option is to index the threshold to some measure of inflation, which would cost around $450 billion over the next 10 years. If policy makers decide to do this, they will need to find offsets. The state and local tax deduction may be a logical pay-for for a number of reasons, but myriad other tax and spending options exist as well.
• Broaden the tax base. Almost all economists agree that the tax base should be broadened. The current tax system has upwards of $1 trillion a year in deductions, exclusions, credits, and other tax loopholes; and these tax expenditures likely lead to both higher than necessary tax rates, and larger than necessary deficits. And in addition to being expensive, tax expenditures tend to be distortionary, causing people to make sub-optimal choices and driving up the price of things like health care and housing. They also tend to be quite regressive in ways that most voters never realize, and are far less transparent than equivalent spending programs. Policymakers should take a careful look at all current tax expenditures to decide which ones can be eliminated, which can be capped or reformed, which can be consolidated, and which simply belong on the spending side of the budget.
• Consider the viability of new forms of taxation. Given the limitations of the current tax system, possible new sources of revenue are being increasingly mentioned. Most recently, for example, a financial transactions tax (FTT) has been discussed.  Some forms of an energy tax should certainly be considered, as it would raise revenues and promote improved energy and environmental policies. A somewhat more significant change might be to switch, perhaps in part, to some form of a consumption tax -- perhaps a progressive consumption tax or value-added tax (VAT).  Consumption taxes tends to be popular with economists since they can generate significant sums of revenue while encouraging savings and investment.

To summarize: at a minimum, tax reform needs to simplify the tax code, close the tax gap, reform corporate taxation, address the expiration of the 2001/2003 tax measures, fix the AMT, and broaden the tax base. We should also consider new types of taxes, and if it becomes evident that this not enough, we should seriously entertain moving toward a consumption-based system.

And even doing that cannot – and should not – replace tough and painful measures to bring spending under control.

While this all might seem like a tall order, its magnitude reflects that of the problems we face.

A few hours before similar remarks were made by Fed Chairman Bernanke (see previous blog), his European counterpart, European Central Bank (ECB) head Trichet, had noted how important it is that European governments come up with "ambitious fiscal consolidation strategies in a timely manner":

“As regards fiscal policies, we re-emphasise how important it is for governments to develop, communicate and implement ambitious fiscal consolidation strategies in a timely manner. These strategies must be based on realistic output growth assumptions and focus on structural expenditure reforms, not least with a view to coping with the budgetary burden associated with an ageing population. As agreed by the ECOFIN Council on 2 December 2009, governments need to set out concrete and quantifiable adjustment measures that will lead to a sustainable correction of fiscal imbalances. Several countries will have to start consolidation in 2010, and all others in 2011 at the latest."