By: John Maggs

October 12, 2010 04:50 AM EDT

The Obama administration has been touting the government’s recuperation of billions of dollars in TARP money, but the big-bank rescue program still hasn’t accomplished one of its main goals: spurring lending to fuel a recovery.

Once the distressed banks were stabilized, the administration argued, they would be able to resume their indispensable role of lending to businesses and consumers.

By any number of measures, though, banks are actually lending less today than in the depths of the financial crisis. And the deficit is hobbling a recovery that has failed to generate job growth — an issue that is at the heart of the battle for control of Congress in this fall’s midterm elections.

Beneficiaries of the Troubled Asset Relief Program are back to generating huge profits, but they aren’t loosening their purse strings, according to data from the Treasury Department. In fact, banks are calling in loans much faster than they are making them, on pace to take a half-trillion dollars in credit out of the economy this year — even more than in 2009. And without this credit, consumers won’t spend as much and businesses won’t invest, hindering growth.

With the passing of the two-year anniversary for TARP on Oct. 3 — and with it, the authority to issue new loans — the White House has portrayed the program as a wise investment for America’s taxpayers — one that just might turn a handsome profit.

“I’m going to take a minute to brag,” said White House press secretary Robert Gibbs, describing the new plan to recover the government’s $185 billion bailout of insurance giant American International Group. “I’m not walking way out on a limb to say that was not the conventional wisdom.”

Republicans, however, have complained that TARP was misused to promote President Barack Obama’s political interests.

“What started as an emergency capital injection to thaw frozen credit markets in the midst of a financial panic morphed into a revolving bailout fund to advance the administration’s political, social and economic agenda,” Texas Rep. Jeb Hensarling charged in an op-ed last week in Investor’s Business Daily.

Even if it ends up turning a profit, he wrote, “You can put a gun to your neighbor’s head, take his kid’s college fund, bet it on a roulette table in Vegas and triple his money. But that is not a risk that your neighbor voluntarily undertook.”

Neither side, though, has paid much attention to whether the government’s bailout of the big banks has led to a resumption of lending to U.S. consumers and businesses.

Administration officials tend to be vague about it. In “Welcome to the Recovery,” Treasury Secretary Timothy Geithner’s upbeat “Mission Accomplished” column in The New York Times, he is circumspect.

“Major banks, forced ... to raise capital and open their books, are stronger and more competitive. Now, as businesses expand again, our banks are better positioned to finance growth,” he said.

Federal Reserve Chairman Ben Bernanke said in a recent speech that, even though large firms can get loans, small businesses are struggling to find credit. That’s also the view of the administration, which recently enacted a $30 billion program to boost lending to small businesses.

But, actually, bank lending is far worse. Just consider the scale of bank lending before the crisis.

In normal times, new commercial bank lending grows each year. In a handful of bad years, it has dropped a bit, but, by 2007, it had grown to $754 billion.

It fell to $643 billion as the crisis hit in 2008, the biggest drop ever. Then, in 2009, it did something it had never done before: It went negative.

In 2009, banks effectively called in $432 billion more in loans than they made — something bankers call “deleveraging.” By this summer, as many banks were reporting big profits, the loss of credit got even worse. In the quarter ended June 30, credit disappeared at an annual rate of $574 billion.

Instead of adding hundreds of billions in new credit, as they do in normal times, banks are effectively taking huge amounts of credit out of the economy, depriving businesses of money to invest and hire and consumers of credit to revive their spending.

Vincent Reinhart, a former Federal Reserve economist, said the unprecedented lack of lending comes from a vicious circle of low expectations by the banks that the economy will improve, which further deters lending and thus lowers hopes for growth even more.

A fellow at the American Enterprise Institute, Reinhart blamed the administration for sending mixed messages, urging banks to reduce their risk-taking through tough new accounting standards, while simultaneously urging banks to lend more.

The Treasury Department’s monthly survey of lending by TARP recipients shows that they haven’t increased lending.

The monthly survey was unveiled with a flourish after TARP passed in October 2008, as a tally to show the program’s impact, but unceremoniously demoted to a spreadsheet a year later. But that seems hardly any surprise, since the story it tells is not a good one for the administration.

To take one example of the banks listed, mortgage loans outstanding by Citigroup had fallen to $155 billion in November 2008, after months of financial crisis, and they have just kept falling, reaching $120 billion last August. Likewise, with Citi’s credit card lending, it fell from $148 billion in the first tally to $124 billion most recently.

Douglas Elliott, a former investment banker now at the Brookings Institution, said that TARP recipients are continuing to get an incredible assist from the federal government — the ability to borrow money at extraordinarily low rates from the Fed. The idea was that this easy money would be passed along to others, but that doesn’t seem to be happening, he said.

This is partly a result of the bad prospects for growth and partly a result of uncertainty over financial regulation, which was overhauled last summer but has yet to be implemented.

In the meantime, Reinhart said, “many businesses and consumers are continuing to have trouble getting credit.” Based on the experience of other countries in financial crises, he expected it could take as many as seven years to get past this credit crunch.