20081003-Goldman Sachs-US Economics Analyst
TARP Becomes Law—Now What?
! The Treasury’s Troubled Asset Relief
Program (TARP) passed the House of
Representatives today and has been signed
into law. The program will have $700
billion in capacity to purchase and
guarantee illiquid and distressed assets.
! The program should free up capacity on
bank balance sheets and encourage the
recognition of losses. However, the
program does less to directly recapitalize
banks, leaving a gap in the policy
response. An important question going
forward is whether the government will
formulate a recapitalization strategy as
well, or whether it will pursue an informal
approach led by the FDIC.
! Several questions remain. The most
important is the pricing of the assets the
program purchases. This will have an
important impact on the participation of
the program, as well as the cost to the
government. Details regarding the
purchase mechanism and the range of
assets to be purchased also remain
undetermined.
! With the boost from fiscal stimulus gone
and the impact of tighter credit conditions
working its way into the real economy, US
economic activity has decelerated sharply
in recent weeks. The intense distress in
financial markets—which seems unlikely
to dissipate quickly—further darkens the
outlook.
! As a result, we are marking down our
forecasts for growth and interest rates
substantially. The recession that we have
been forecasting now looks likely to be
deeper and longer, taking the
unemployment rate to 8% by late 2009 and
pushing the Fed to cut interest rates to 1%
or lower.
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