More aid to the banking industry and funding towards foreclosure reduction should be the main focuses of the second tranche of the $700 billion TARP program, Fed Vice Chairman Donald Kohn told lawmakers on Tuesday.
Speaking in testimony on how lawmakers should use the second and final $350 billion installment of the financial bailout package, the Fed's second in command said that the normalization of the credit markets was important.
He also said that the cost of the program to the taxpayer would be limited if the government took equity as collateral for the loans given that taxpayers could be expected to make a modest gain as the economy recovered.
The comments come in the midst of heated debate on Capitol Hill, where lawmakers are attempting to put limitations on how the next administration will use the funds to rescue the economy from disaster.
Earlier on Tuesday, in a speech to the London School of Economics, Fed Chairman Ben Bernanke said that more measures are needed to combat the credit crunch and provide additional liquidity to the financial system.
While Bernanke applauded the incoming administration's intentions to deploy an ambitious fiscal stimulus package, he argued that "fiscal actions are unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system."
On Monday, U.S. President George W. Bush officially asked, on behalf of the incoming Obama administration, that Congress release the funds for the President-elect's team.
On Friday, House Financial Services Committee Chairman Barney Frank said he was working with congressional Democrats on a bill to put additional limitation on how the next half of the package would be spent, including the elimination of CEO compensation on firms participating in the program and assurances that a portion of the TARP would be spent on foreclosure limitations.
Kohn is slated to speak at 2 p.m. EST, but the remarks were released early.
By Erik Kevin Franco and edited by Nancy Girgis
©CEP News Ltd. 2009