Will TARP be Renewed?

UPDATE: Treasury Secretary Geithner testified on Nov. 19 before the Joint Economic Committee, stating that "we are winding [TARP] down and will close it as soon as we can." Secreatry Geithner also stated that the Treasury will use "substantial resources" from remaining TARP cash to pay down some of the debt (see our commentary here for why such a statement is a bit misleading).

Today, a Wall Street Journal editorial discussed Senator John Thune’s introduction yesterday of a bill that would prevent Treasury Secretary Timothy Geithner from extending TARP. The bill would prevent the Treasury from making any new loans, equity purchases, or transfers to financial institutions, but would not affect the $386 billion in outstanding investments.

TARP is scheduled to expire on December, 31, 2009, although it can be renewed by the Treasury Secretary through October 3, 2010 upon submission of a written request to Congress.

According to the editorial, Secretary Geithner refuses to rule out renewing TARP, just as Senator Thune has been slowly picking up Democratic support. A Financial Times article has even reported that the Treasury is eager to extend TARP.

Some financial observers believe that extending TARP would make sense for the economy, but would be extremely unpopular politically. Others believe that there are ways besides TARP to help banks shore up capital.

From the Administration’s perspective, renewing TARP would provide a war chest in case of another financial emergency. If TARP is not renewed and economic conditions change to warrant the use of additional funds for financial industry support, the Administration could potentially face a more disapproving Congress.

If the bill to prevent TARP’s renewal is not passed and Secretary Geithner decides there are convincing economic reasons to continue the program, any such extension should come with a clear exit strategy.