Kashkari defends $700-billion financial rescue plan

Neel Kashkari, who oversees the US Treasury’s $700 billion financial-rescue plan, defended the programme on Sunday after congressional leaders threatened to withhold the remaining half of the funding.

“We are confident we are pursuing the right strategy to stabilise the financial system and support the flow of credit to our economy,” Kashkari, a Treasury assistant secretary, said in a speech on Sunday in Washington.

Treasury Secretary Henry Paulson, who has committed $330 billion to aid financial companies, is under pressure from some members of Congress to also help homeowners avoid foreclosure. The conflict makes it more likely that decisions about the rest of the money will be deferred until after President-elect Barack Obama takes office on January 20.

 

The Treasury has ignored the “clear congressional intent” of the Troubled Asset Relief Programme to reduce home foreclosures, House Financial Services Committee Chairman Barney Frank warned on Saturday. Senate Banking Committee Chairman Christopher Dodd echoed that sentiment, telling reporters on Saturday, “I would be a very hard person to convince that this crowd deserves to have their hands on the next $350 billion.”

In his speech, Kashkari said the banking system is “more stable” now than in October, when Congress passed the bailout legislation. Firms that have taken money from the program should increase their lending, “particularly in this time of economic disruption,” he said.

Banks “have an obligation to continue making credit available to creditworthy borrowers and an obligation to work with borrowers who are struggling to avoid preventable foreclosures,” he said. “This lending won’t materialise as fast as any of us would like, but it will happen much faster as a result of using the TARP.”

Kashkari acknowledged that the department’s intervention in the credit markets has caused unintended consequences that required new efforts to “put out the fire.” Kashkari, speaking to a group of mortgage bankers in Washington, faced some tough questions about why the Treasury keeps devising new programmes for the bailout.

“We understand that there is confusion because there are additional programs coming, but hard choices are easy to make when you really don’t have a choice,” Kashkari said. “When the consequences of inaction are so great, we have to step in.”

One audience member noted that the Treasury’s shifting decisions for aiding the markets may have actually kept them frozen. The series of new programmes are blindsiding investors who have decided to stay on the sidelines, he said.

Kashkari defended the administration’s approach, saying the consequences of allowing the financial system to fail were too great for a go-slow approach.

“Over the last 15 months or 18 months of the credit crisis it’s only gotten deeper, it’s only gotten more severe,” he said. “And I would rather be on our front foot, going after the problem aggressively with new programmes, trying to be creative, trying new things, rather than just sitting back and saying, ‘Let’s just let it happen and see what happens, see if the system collapses.’”

Kashkari said TARP money should be used to make investments, rather than loans, because the $700 billion, while “a lot of money,” is “finite.” The Federal Reserve is in charge of loans because it doesn’t have a cap on the amount of money it can use, he said.

“It wouldn’t make sense, for example, to have the TARP become a lending program because it would use capacity, when the Fed could do it,” he said. “We want to use the right tool for the right job.”

Kashkari said the narrowing of credit-default swap spreads for the nation’s eight largest banks shows the program is working. He said the Treasury is working to determine the impact of the capital injections, a point raised by a report this week from the Government Accountability Office, which called on the department to bolster its supervision of the plan.

“We want to see the credit crisis run its course, see our institutions healthy, extending credit, and some return to normalcy,” Kashkari said. “But we’re not there yet.”