Abstract
We begin this chapter on Troubled Asset Relief Program (TARP) and the real economy by revisiting the two paths through which the TARP program might improve the real economy. Both involve increasing credit supply, which in turn may help credit customers increase their real spending and boost the real economy. The direct path begins with the primary channels through which TARP banks may increase their credit supply, followed by increased spending by the recipients of this credit on investment, employment, and/or other real goods and services. The indirect path begins with reducing systemic risk by bailing out banks that might otherwise fail or threaten the financial system. The safer financial system with healthier, better capitalized banks may increase credit supply by both TARP and non-TARP banks, which may, in turn, result in increased real spending by the borrowers from both types of banks. The remainder of this chapter reviews the evidence on the success of the program through both paths.
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