An "Extra" $200 Billion In Tarp Money To Burn Hole In Government's Pocket

The Treasury Department announced over the weekend that its TARP losses will be $200 billion less than expected. Banks are paying back money at an unexpectedly rapid pace. There are even rumors that Citigroup (NYSE:C) will return $20 billion to the Treasury soon.

The government said in August that TARP costs would be $341 billion over 10 years. That number has fairly quickly come down to $141 billion.

All that is left to decide is where the $200 billion in “found” money will go.

The shape over the debate about the fate of the funds is predictable. Democrats and The White House will almost certainly want to put the money toward job creation to help the 7.2 million people who have lost jobs since the beginning of the recession and those who will lose unemployment benefits early next year. The number of jobless Americans is likely to grow into next year even though the pace of employment loss is slowing.

The government’s $787 billion stimulus package may be helping to generate revenue at many businesses, but its programs have not demonstrated that they can add or save three million jobs which was one of their primary goals. The stimulus has also not funneled enough money into state and municipal treasuries to keep the number of people who have local government jobs from shrinking.

The debate about to occur will be over whether the $200 billion in TARP savings should be added to the stimulus package,  moving the entire amount devoted to economic recovery to $1 trillion.

Fiscal conservatives will want the TARP windfall to go to reducing the budget deficit. They will argue that any benefit from the TARP program was always meant to accrue to the taxpayers who originally put up the money and taking it out of their hands will eventually increase taxes and do nothing to cut the national debt which is well over $12 trillion. The debt is expected to grow and annual interest payments on it are expected to top $700 billion by 2019.

The fight over where the $200 billion will go can be added to the battle over nearly $800 billion in funds for healthcare reform and the issue of whether federal taxes to people and businesses will rise in 2011 as expected. Many economists believe that raising taxes on the heels of a recession will simply cause another one.

A number of people would not have guessed that the current stimulus package would do so little to revive job growth. That means that the effects of adding another $200 billion to the effort is nothing more than a guess either.

Douglas A. McIntyre