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Loose Change

You know that good feeling you get when you put on your warm jacket for the first time in the season, reach into the pocket and find a $20 bill you didn’t know you had?

President Obama knows that feeling. Just when he was under pressure to do something — mainly, to spend money — to reduce unemployment, his administration reached into the pocket known as TARP and pulled out $200 billion, or maybe $300 billion.

TARP, the Troubled Asset Relief Program, is the $700 billion Congress reluctantly appropriated to rescue the financial system from potential collapse late in 2008 and early in 2009. Some of that money went to institutions like Bank of America and Citigroup, which might not have survived without it. A lot went to institutions like Northern Trust, which never wanted or needed the money, but were corralled into taking it to avoid stigmatizing their shakier competitors.

A big chunk went to AIG, the insurance holding company that ran its business as though life were one big casino. And, ultimately, more than $50 billion went to General Motors and Chrysler, whose potential demise did not threaten the financial system but would have inconvenienced a lot of people, many of them Democrats.

The government ended up owning large interests in many of these companies. That is where the good news comes in. When the collapse of Lehman Brothers spread panic through the financial world last year, values of every sort of asset — troubled or otherwise — collapsed. This made even sound institutions appear to be jeopardized, and made weaker companies appear to be in worse shape than they actually were. But businesspeople who argued that the presumed “market value” of their assets really reflected the absence of a market, not the realistic worth of their holdings, were accused of hiding their heads in the sand. The estimated cost of restoring the financial system ballooned.

Then the emergency passed. By rescuing AIG multiple times as its bets turned bad, the government made clear that there would be no more Lehman-like collapses. That removed the threat of financial institutions toppling like dominoes. Since spring, asset values have steadily recovered. One bank after another has repaid the government’s money, often with a handsome profit, in order to exit TARP and get the government out of its business. This trend now has spread even to the weak sisters, with Bank of America announcing plans to repay $45 billion and Citigroup reportedly preparing to start its own repayments.

The administration estimated as recently as August that up to $340 billion of the TARP investments would be lost. That estimate was silly at the time and is ludicrous now. The administration reportedly believes its losses now will total only about $60 billion, roughly split between the auto companies and AIG.

That estimate strikes me as possibly too low, but still much closer to reality than the earlier guess. So the administration and its congressional allies, who are petrified by the prospect of facing voters amid double-digit jobless rates, see this as a source of new money to address the problem.

That is unfortunate. The banks are in better shape than we assumed a year ago, but there are all sorts of other weak spots in the financial plumbing. Fannie Mae and Freddie Mac, the government-sponsored companies currently in federal hands, are handing out mortgages to shaky borrowers in order to support the housing market. So is the Federal Housing Administration, which still permits borrowers to put just 3 percent down. Sound familiar? This is how the financial mess began in the first place.

Then there is the Medicare funding shortfall, which will become acute in just a few years, and the long-term funding gap for Social Security. And the financial weakness of the federal Pension Benefit Guaranty Corporation and the many underfunded state and private pension plans.

Republicans want to use the recovered TARP funds to reduce the government’s current borrowing needs, better known as the deficit. That does not sound very constructive amid a deep and painful recession. But I look at it as a way of husbanding meager financial resources, even if only in the form of future borrowing capacity, to meet storms that we are almost certain to encounter in the future.

As with the various economic stimulus packages already passed, most of the spending will do little to promote real economic growth, which is the only sustainable basis for jobs. Backers of the do-something approach would argue that a short-term fix is fine when we are dealing with recession-induced unemployment that should abate as the economy recovers. As with so many things in life, the question is how to balance the short-term benefits against the long-term costs. Spending the “found” money on short-term jobs relief is, in my view, a bad deal.

Then again, I wasn’t the one who found $200 billion in my pocket. Sometimes it’s better to be lucky than smart.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.

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