For all the attention paid to the nearly $1 trillion fiscal stimulus package pending before Congress, many economists are calling it a sideshow.
They're certainly calling the White House's other big effort — limits on pay for executives at banks that received bailout funds — economically irrelevant.
Many think the truly important financial story this week is happening down the block from the White House at the Treasury Department, where a small group is meeting — largely in secret — to rewrite the rules of how the government will save the banking system.
What is this group at Treasury planning?
It is deciding how to spend the remainder — more than $300 billion — of the $700 billion left in the Troubled Asset Relief Program, or TARP.
"But what little has leaked out of that closed-door meeting tells us that the way they spend that money could fundamentally change our banking system," NPR's Adam Davidson tells host Robert Siegel. "It could make some banks go out of business effectively — [and make] other banks get much stronger."
Why is this being done behind closed doors?
The fiscal stimulus is very public. But Treasury has a problem: "Any rumor that comes out as they're trying to decide what to do can send the stock market hurtling one way or hurtling the other," Davidson says. "It can create panic throughout the investment community at a time that they're trying to do the opposite — create calm and stability."
He adds: "Frustratingly, they are doing much of this in secret. We are not hearing the debate. We're not hearing the struggle to come to a solution."
Is it time to try something different like creating a "bad bank"?
Over the last few weeks, the idea of creating a "bad bank" circulated in Washington, D.C. The idea was to create an institution with the job of gathering all of the toxic assets, including mortgage-backed securities that have lost much of their value, that banks are holding and put them in one place. This would allow banks to go on and function normally without the burden of these assets.
Davidson says the idea of creating a "bad bank" is fading in popularity. "If you price it right in theory — the government could actually make money. If you price it wrong, the government could lose a tremendous amount of money," he says.
A new idea that's being discussed is for the government to create a more aggressive kind of insurance than Federal Deposit Insurance Corp. insurance to protect banks from catastrophic loss without requiring the government to step in and buy those assets.
Why are we bailing out banks that got us into this crisis?
"This is absolutely maddening," says Davidson, adding that it's safe to say it's also maddening for President Obama, Treasury Secretary Timothy Geithner, Federal Reserve Chairman Ben Bernanke, and many citizens to see the government so intent on protecting banks from the consequences of their own — as it turns out — imprudent investment decisions.
Davidson says the Obama administration and many economists say that "letting the banking system as a whole collapse would turn this recession into a far more catastrophic event."
Some say there are ways of structuring a solution that would punish the managers and shareholders of the banks that got us into this mess without propping them up. Other solutions, Davidson says, do prop them up and help the very people who caused this very problem.
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