While questioning Treasury nominee Tim Geithner at his confirmation hearing this morning, Sen. Chuck Schumer said he spent some time calling around Wall Street this weekend, and what he heard was that if the government wants to clean out all the toxic assets from the financial system, it will cost some three to four trillion dollars. Which is to say, an order of magnitude larger than the second $350 billion in TARP money the Senate just approved.
That's pretty daunting stuff when you consider that the banking system probably won't recover until most of this bad debt gets cleaned up. And that the economy won't recover till the banking system does. Alas, the only thing worse than spending $3 trillion to clean up the banks may be not doing it.
Update: One caveat: The $3-4 trillion figure is enormous relative to the size of the TARP, but significantly less so relative to the size of the Fed's balance sheet, which grew from around $1 trillion in mid-September to well over $2 trillion by mid-December (and is even higher today). That's basically the sum of all the loans the Fed has extended to various financial institutions.
Granted, the Fed can't technically just buy assets from troubled banks (Congress has to approve that, as with TARP). But there's a lot it can do short of that (as in the Bear Stearns case, when it floated a bank billions of dollars in loans and took bad assets as collateral), which may end up being necessary here.
--Noam Scheiber