$700 billion for financial system may not be enough

A wide range of economists and market analysts say the $700 billion financial rescue package that lawmakers struggled to pass in October may not be enough money to shore up the financial system.

More than two months after the package was approved, markets continue to be volatile, banks are skittish to lend and a rising number of foreclosures and defaults threaten to further imperil the housing market at the center of the financial crisis.

{mosads}Allen Sinai, of Decision Economics Inc., and an adviser at several House Democratic leadership meetings this fall, said banks that have received money under the rescue program still have weak balance sheets full of murky investments, which suggests $700 billion might not be enough. “It’s not a lot,” he said.

The Federal Reserve Bank on Tuesday surprised observers by slashing interest rates to almost zero — a range of 0 percent to 0.25 percent. The unprecedented action by the Fed, which also announced it is considering a wide variety of new tools to fight deflation, reflects deep-rooted fears that the country could slip from a recession to a depression without drastic government action.

The Bush administration has spent nearly half of the $700 billion so far, and is required to make a request to Congress for the remaining $350 billion in the Troubled Asset Relief Program (TARP). Some say that still wouldn’t be enough.

“I think you could get through $350 billion pretty quickly,” said Brian Gardner, senior vice president at Keefe, Bruyette & Woods, a New York-based market research firm. “Look how quickly we went through the first $350 billion and we didn’t really do anything on foreclosure mitigation and asset purchases.”

A request by President Bush for the remaining $350 billion would set off a bruising political fight in Washington, where Democrats, Republicans and the nonpartisan Government Accountability Office have been critical of how Treasury Secretary Henry Paulson has spent the funds.

Democrats are ramping up their calls on the Bush administration to use some of the money for a plan to reduce foreclosures and modify existing mortgages. House Speaker Nancy Pelosi (D-Calif.) said the administration has “totally ignored” any effort to reduce foreclosures.

Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, will likely introduce legislation on mortgage modifications by early January, said Steve Adamske, Frank’s spokesman. Any legislative push to reduce the number of mortgage foreclosures would add to the pressure for more money, since it could cost tens of billions of dollars at a minimum.

There’s also pressure to spend the roughly $15 billion left from the initial half of the rescue package on the ailing auto industry. The White House has said it is considering using the money for the industry, but has yet to announce the details of any new effort.

The TARP money could also be used to make further injections of equity into banks, the focus of $250 billion thus far.

Pelosi and Senate Majority Harry Reid (D-Nev.) are not at the moment considering any additional money for the financial industry, their spokesmen said.

If Bush does not request additional TARP funds, President-elect Obama would probably seek it in January or February, when the new president and Congress are expected to move on an economic stimulus package that could be worth as much as $600 billion.

{mospagebreak}Advocacy groups and lobbyists are not lobbying for a larger bailout package for the financial industry, but with the competing demands, some economists are questioning whether more money won’t soon be needed.

In a recent essay, economist Paul Krugman expressed such thoughts. “My guess is that the recapitalization will eventually have to get bigger and broader, and that there will eventually have to be more assertion of government control — in effect, it will come closer to a full temporary nationalization of a significant part of the financial system,” Krugman wrote in The New York Review of Books.

{mosads}Two of the nation’s largest financial institutions — Citigroup and AIG — have already required repeated bailouts, and some industry experts expect others to return for more money.

“Do I expect Citi will come back at some point for more money? Yes,” said Joshua Rosner, analyst at Graham Fisher & Co. in New York. “I think Congress is going to be asked for money.”

The view isn’t shared by all, and some economists say it is too hard to predict the industry’s financial needs based on the past couple months.

“I don’t think you can extrapolate from recent trends about the speed at which money has gone out in the last couple months,” said Bert Ely, a consultant in Alexandria, Va. “I just don’t think it’s possible to make a judgment at the moment.”

Dean Baker, of the Center for Economic and Policy Research, said that even if more money is necessary, it would likely come from the Federal Reserve rather than from a congressional bailout.

“My expectation is that they find a way to finagle the money out of the Fed if they need additional money,” Baker said. “It would look bad. You have to balance off whatever benefit you would get from additional money from the clearly bad signal they would have from going to Congress.”