Responsibly Using TARP for Jobs

Washington DC is abuzz over the $200 billion surplus from TARP. Many want to use that money to create jobs. However, the policy proposals are jumbled and incoherent. The democrats and Obama said something about green jobs, but no way on how to get there without massively re-writing the TARP authorization.

One impediment to job creation these days, according to business writers, is the absence of business credit. The business credit market is hardly moving at all. Most small businesses get their credit lines from local and regional banks, who have largely weathered through the financial crisis intact, but who are also scared of lending money. Despite the whole TARP bailout, and the Fed's rescuing of the commercial paper market, the business credit market remains choked off.

Therefore, one quick way for the Federal Reserve and the Treasury Department to jump start business lending, is to use the TARP money to finance business lending. We can build on the CDO-bailout model: We make the banks agents of the government. If a bank is going to lend out some money ($1 million, say) to a business, the bank can use TARP money to double the loan (plus $1 million TARP money). This way, we preserve some accountability, because the banks still have skin in the game. At the same time, we instantly double the size of the business loan market. The Fed and Treasury are not equipped to administer the small amounts in business loans, so using the banks as government agents minimize the administrative requirement.

I hope this idea gets some traction.