“They've been extending their authority for the last year,” says Washington-based economist Dean Baker, co-director of the Center for Economic and Policy Research. “This is really a stretch.”
Read The PPIP Fact Sheet
In particular, the PPIP will use a small, amount of money from the second round of the TARP ($75 billion to $100 billion) money approved by Congress and use the Federal Reserve’s emergency lending powers to leverage that by as much as a 6-to-1 debt-to-equity ratio.
“This is an end-run around Democracy,” Rep. Brad Sherman (D-Calif.) told CNBC.com. “No one even imagined we would see trillions of dollars shifted from Washington to Wall Street that no member of Congress ever voted for.”
Sherman is referring to the PPIP and other recent Fed lending programs, including the recently launched Term Asset Lending Facility.Though the Fed’s authorized to use its balance sheet for such lending activity under “unusual and exigent circumstances”, according to section 13.3 of the Federal Reserve Act, lawmakers and analysts alike have become increasingly concerned about the consequences.
Sherman, who voted against the TARP, calls the Fed’s balance sheet “the endless multiplier”, while Baker says the once all-important TARP money (not to mention its original sticker shock) has been reduced to “almost a fig leaf” in the effort to rescue the financial sector.
Moreover, some in Congress say the PPIP, once again, puts the central bank in an awkward position.
"When you see the Fed and Treasury teaming up, putting programs together, the concern becomes, is the central bank still independent?" asks Sen. Bob Corker (R-Tenn), who generally approves of the plan's concept. "There's an erosion process, an erosion of that independence."
Corker says he voted against the release of the second $350 billion in TARP funding because he was concerned about how it could be used.
What’s particularly alarming about the PPIP program, critics say, is that unlike the original TARP concept, which called for a dollar-for dollar investment in troubled firms through a capital-for-equity swap, the PPIP will essentially use government money to back more limited investment capital from the private sector. Based on early analysis of the PPIP fact sheet, some say taxpayers could end up providing more than 90 percent of the funds to buy the troubled assets.
The PPIC is expected to generate some $500 billion in purchasing power but the government says that could reach $1 trillion.
Skeptics say the White House and Treasury Department are aware that Congress is unlikely to approve additional funding for the effort, given the popular outrage over Wall Street compensation.
"Leverage it up. Guarantee the money," is how one industry source put it. "I don't think Congress is in any mood to approve more money right now."
That thinking played out in an interchange during a House hearing Tuesday on the AIG bonus flap.
“We recognize it will be extraordinarily difficult,” Treasury Secretary Timothy Geithner told the panel.