Is the federal government hitting the target with billions to ease the financial crisis?

Treasury Secretary Henry M. Paulson announced this week that the $700-billion Troubled Asset Relief Program, which was created to rescue banks from their "illiquid" investments in the housing market, won't be buying those toxic loans and securities after all. Instead, it will continue pumping cash directly into shaky banks and other lenders. We don't object to the change in TARP's direction, but we're not convinced that the government's efforts are focused on the problem they were meant to solve.

Despite the urgency with which it sold the program to lawmakers, the administration couldn't seem to make up its mind about the goal of the asset-buying program. Some officials wanted just to create a market for the mortgage-backed securities that banks couldn't sell, with the government paying as little for them as possible. But others wanted to pay a premium for those assets as an indirect way of boosting the banks' balance sheets. It didn't take Paulson long to decide that it made more sense to fortify banks by investing in them directly.

A common criticism of TARP is that it hasn't accomplished what it was supposed to, namely, easing the credit crisis that was threatening to sink the economy. Data from the financial markets suggest that TARP has been, at best, partly effective -- the interest rates that banks pay to borrow money from one another have dropped sharply, and corporations are starting to pay lower rates on the bonds they issue. Nevertheless, for many consumers and businesses, loans remain unusually hard to obtain.

Paulson says the department plans to expand its efforts to ease the credit crunch, but his strategy for the remaining $400 billion or so in TARP may not do the trick either. In particular, we're skeptical of Paulson's plans to invest in credit-supplying institutions that aren't banks -- for example, giant insurance company American International Group received a $40-billion investment from TARP -- and to address problems in more types of debt markets, including credit card and student-loan debt. As the Center for American Progress points out, the biggest issuers of credit card debt are bank holding companies that have already dined at the TARP trough. And the U.S. Department of Education has already agreed to provide a secondary market for student loans.

The most welcome change that Paulson promised was to use a portion of TARP to avert foreclosures in some unspecified way. That effort may prove to be as weak as the administration's other initiatives to help homeowners, but at least it's aimed at the root of the credit crisis.

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