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Stressing the Positive
In the end, the actual release of the much-hyped bank stress tests on Thursday came as an anticlimax. Everyone knew more or less what the results would say: some big players need to raise more capital, but over all, the kids, I mean the banks, are all right. Even before the results were announced, Tim Geithner, the Treasury secretary, told us they would be "reassuring."
But whether you actually should feel reassured depends on who you are: a banker, or someone trying to make a living in another profession.
I won't weigh in on the debate over the quality of the stress tests themselves, except to repeat what many observers have noted: the regulators didn't have the resources to make a really careful assessment of the banks' assets, and in any case they allowed the banks to bargain over what the results would say. A rigorous audit it wasn't.
But focusing on the process can distract from the larger picture. What we're really seeing here is a decision on the part of President Obama and his officials to muddle through the financial crisis, hoping that the banks can earn their way back to health.
It's a strategy that might work. After all, right now the banks are lending at high interest rates, while paying virtually no interest on their (government-insured) deposits. Given enough time, the banks could be flush again.
But it's important to see the strategy for what it is and to understand the risks.
Remember, it was the markets, not the government, that in effect declared the banks undercapitalized. And while market indicators of distrust in banks, like the interest rates on bank bonds and the prices of bank credit-default swaps, have fallen somewhat in recent weeks, they're still at levels that would have been considered inconceivable before the crisis.
As a result, the odds are that the financial system won't function normally until the crucial players get much stronger financially than they are now. Yet the Obama administration has decided not to do anything dramatic to recapitalize the banks.
Can the economy recover even with weak banks? Maybe. Banks won't be expanding credit any time soon, but government-backed lenders have stepped in to fill the gap. The Federal Reserve has expanded its credit by $1.2 trillion over the past year; Fannie Mae and Freddie Mac have become the principal sources of mortgage finance. So maybe we can let the economy fix the banks instead of the other way around.
But there are many things that could go wrong.
It's not at all clear that credit from the Fed, Fannie and Freddie can fully substitute for a healthy banking system. If it can't, the muddle-through strategy will turn out to be a recipe for a prolonged, Japanese-style era of high unemployment and weak growth.
Actually, a multiyear period of economic weakness looks likely in any case. The economy may no longer be plunging, but it's very hard to see where a real recovery will come from. And if the economy does stay depressed for a long time, banks will be in much bigger trouble than the stress tests - which looked only two years ahead - are able to capture.
Finally, given the possibility of bigger losses in the future, the government's evident unwillingness either to own banks or let them fail creates a heads-they-win-tails-we-lose situation. If all goes well, the bankers will win big. If the current strategy fails, taxpayers will be forced to pay for another bailout.
But what worries me most about the way policy is going isn't any of these things. It's my sense that the prospects for fundamental financial reform are fading.
Does anyone remember the case of H. Rodgin Cohen, a prominent New York lawyer whom The Times has described as a "Wall Street éminence grise"? He briefly made the news in March when he reportedly withdrew his name after being considered a top pick for deputy Treasury secretary.
Well, earlier this week, Mr. Cohen told an audience that the future of Wall Street won't be very different from its recent past, declaring, "I am far from convinced there was something inherently wrong with the system." Hey, that little thing about causing the worst global slump since the Great Depression? Never mind.
Those are frightening words. They suggest that while the Federal Reserve and the Obama administration continue to insist that they're committed to tighter financial regulation and greater oversight, Wall Street insiders are taking the mildness of bank policy so far as a sign that they'll soon be able to go back to playing the same games as before.
So as I said, while bankers may find the results of the stress tests "reassuring," the rest of us should be very, very afraid.
- Posted in
27 Comments so far
Show AllIt will be interesting to see how much damage the Obama Administration will do to the Democratic Party.
If anything can save the Republicans, these guys can.
Xe Technology: To Purify America
http://www.youtube.com/watch?v=4zYqMkgzOJ0
Which, of course, is their goal. After all, the good cop is useless without the bad cop.
Very good! The fact is the dems have been saving the republicans for years. Have you ever seen a party more adept at loosing than the dems? My questions remains: What are all the dumb ass democrats going to do now? Vote for the opposition Republican party? There has been and there will be no change when it comes to, war, taxing the rich, universal healthcare, investigating the war crimes of BushCo, holding the banksters to account under the current administration and Congress. Gee Oh'Bumma seems a lot like George Bush. This is what's needed to wake people up that there is no difference between the parties when it comes to important policies. The revolution is 150 years over due. Remember his betrayal of the constitution on the FISA vote? There's no way people can win in this rigged system. Either work and contribute to a third party (Ralph Nader, he was right all along) or take to the streets and riot! Close down the cities and protest! Then again you can hide you heads in the sand. The republicans always find doing that quite affective.
Where’s my waitress?
"I am far from convinced there was something inherently wrong with the system."
Is this guy suffering from Alzheimer's disease or does he just need a reality check?
We're surfing the crash of the consensus fictional reality. All the electronic money you care to print cannot change the fact that putting a massively unfair proportion of the real wealth, the land, the machine tools and power generation equipment, in the hands of an ultra-wealthy few is always a recipe for disaster.
A rich man is always willing to leave a house empty because homelessness drives up the price of his asset. Rich people pollute the farmland for short-term profits. Rich men cut down all the timber and leave forests of fire-prone slash and brush. When an asset is no longer necessary for your survival you can abuse it for profit.
The real cause of the crash, line in 1929, is the ownership of the majority of the wealth by a tiny, uncaring, minority. You don't own your house; the bank does. Shareholders don't really own the banks; the board and CEO's loot them from the inside and ruin shareholders.
Your house, your stock, your pension; worthless. You never owned those things and now the value has been taken from you.
But, be happy, we have the first "Black President." :-)
The last chapter in the book is always written first when it comes to policy in D.C.
Of course the bankers will be allowed to return to their regularly scheduled pillaging already in progress.
That has already been decided.
How do I know?
Do you still have a few dollars left in your pocket? Are some of you still hanging onto your house? Considering another refinance?
Predators don't let up until all the meat has been ripped from the bone. And marrow is like a fine wine to help the hyenas digest the skeleton itself.
There's much more hunting to do.
The bankers are not even close to finished yet.
Newsweek published a story last week - "Bank's Bogus Recovery" - saying pretty much that if it looks like the banks are starting to recover, it's only on paper, and it's mainly due to . . . creative accounting. Go figure.
These were the choices; regulate big finance and subject the money masters of the universe to the pain of playing the game by a set of rules where the interests of all the players are taken into account, or, whitewash the failure of big finance, to the tune of several trillion dollars of taxpayer debt, and let them continue to pay by their rule book (which they make up as they go along).
The chosen path sure as hell isn’t the first option.
Does Middle America really care what happens to Wall $treet? If anything, most would love to see it crash as most people there have nothing to gain from it. Perhaps the author wouldn't mind living in Witchita for a year. He might have more to speak for Main Street. Besides, Wall $treet is doing hunky dory thanks to Obama spoonfeeding it billions and trillions in phoney bailouts.
Main Street, on the other hand, needs lots beyond mere bailouts. This is where the real meaning of poverty needs to be understood which the author lacks. This is not just the sort of poverty that wonders how it pays the bills at the end of the month or how to pay off credit card debt. This is also the sort of poverty that has no expectation of paying off the bills or ever getting out of debt. This is the sort of poverty where things most of us take for granted—like literacy or a work ethic or fathers or heat or legal jobs—may be missing entirely. This poverty goes beyond a lack of money into a lack of empowerment. This level poverty will seem alien to some, and most of us are more comfortable telling ourselves it doesn’t exist, or that if it exists, it only exists in far away places we shouldn’t feel responsible for. I almost feel bad saying that it’s real and it’s here. It’s like telling a kid there’s no Santa Claus. When more people in Middle America are angrily purchasing more guns and ammo, then this is a clear sign that we do not trust the government because it has not only failed us but broken their own laws as well. At this point, not even a mere bailout of Main Street will ease the blood boiling anger out there.
I read yesterday that more people than ever believe in the "American Dream (44%)."
Can you explain this poll? (I forget where I read it.)
Obamania - a delusional disorder related to high TV viewing rates among the baby boomers and all subsequent generations.
In America, Image renditioned Reality. Apparently reality still cannot be tried in court and is to dangerous to release to the general public.
Still a stupid system that only milks the taxpayer.
Loan TAXPAYER dollars to the banks at uber low interest rates so that they can lend this money to the taxpayer with a much higher interest rate.
Why not loan the taxpayers own money back to them at uber low interest rates directly?
Obomber's government is forcing us to lend money to ourselves with the bankster middlemen keeping the interest payments. They are forcing us to be in on a swindle where we are the victims.
Gov't should nationalize the lot of them.
Since it will not, people have to quit supporting the travesty where we can.
Those who do not want Wall Street to own Washington need to invest outside of Wall Street.
Remember, it was the markets, not the government, that in effect declared the banks undercapitalized.
The markets are a den of thieves and all you get from thieves is theft.
Well, earlier this week, Mr. Cohen told an audience that the future of Wall Street won't be very different from its recent past, declaring, "I am far from convinced there was something inherently wrong with the system."
The above neatly summarizes what the thieves are thinking, as well as Obysmal and his shyster goombahs. This is a cancer that will either permanently diminish us or eat us alive.
"But there are many things that could go wrong."
Yea, like the fact that, even if the lying, thieving banksters refill the coffers previously emptied by the lying, thieving banksters, we the passive people will still be vastly unemployed, seeing as how we still won't be making anything the rest of the world wants, and, even if we wanted to, we couldn't, because we uppity Americans simply refuse to work for a dollar a day without any benefits or protection.
So, PK - let's flash forward to Christmas, now also known as Bernanke's magic recovery time - the banks are back in biz. Then what?
Krugman sez: "... in any case (regulators) allowed the banks to bargain over what the results would say. A rigorous audit it wasn't."
***
Fancy that. Following a precedent set by the 9-11 Commission in its treatment of Cheney and his ventriloquist's dummy.
The biggest step that our country could make toward recovery of the economy is to break the dictatorship of the FIRE (Finance, Insurance, Real Estate) sector over the rest of the economy. This puts excessive strain on innovative enterprises to pursue Brobdignagian proportions, conspicuous profits, and magically levitating stock prices just to keep their doors open. The simplest way to accomplish this is to nationalize retail banking to protect the currency and shore up the FDIC; nationalize residential mortgage banking to protect homeowners and prevent properties from falling into disrepair while shoring up Fannie Mae and Freddie Mac; and to provide single-payer healthcare insurance, relieving small and start-up businesses from the expense of healthcare for employees. These measures do not constitute “socialism” by any stretch of the imagination since they would provide an opening for small enterprise to be able to compete with morbidly obese global entities, and in so doing would create the opening for human scales to re-emerge within the economy.
This is what the GOP must advocate if it wishes to rebrand itself as the party of small business as Newt Gingrich hopes, and it is what we must insist that Democrats do if our economy is to revive in this decade.
Paul Krugman and his liberal audience pretend to care about the people's well-being. In reality, they want to use the people's perils to generate more economic opportunities for elites, public and private. So Krugman's main criticism has to do with the execution of the "recovery" plan, not the goals.
We on the far left say: "a prolonged, Japanese-style era of high unemployment and weak growth" is exactly what the doctor ordered. Krugman won't announce this of course, so we have to announce it ourselves. Such is the people's burden under the domination of elites.
High unemployment is a result of the people's dumbing down. In such a state the people don't know that their individual demands drive the economy. They don't know that their destinies are in their own hands. They don't know that they are in control.
Economic growth isn't necessary for the people's well-being. Yet in their dumbed-down state, the people believe the elite myths. The people panic on economic grind-down and look to elites to "restore growth".
We actually need an economic contraction, a sloughing off our backs all the parasitic elites. A recycling of the gargantuan waste. Replacement of thoughtless and green-driven production with thoughtful production in the society's better interests. In particular, local production by small scale local enterprises, in the local community's and the wider society's better interests, with the help of internet connection.
There is no such thing as unemployment in such an economy. Everyone carefully selects his subsistence production and surplus trade to better serve the society. The "depression" we are entering is a good thing. It affords the people an opportunity to cultivate self-sufficiency, and the specific demands in the markets and policies that emancipate the people from elite oppression.
Demand production that is locally owned, sustainable, that serves the society's better interests, and demand public policies accordingly (e.g. enlighten the people). Let the economy grow/shrink accordingly. In practice, the current over-bloated US economy will shrink substantially, maybe by a factor of three or four. Then it will stabilize, with much stronger local economies, and much weaker elite command/control. Teach the people to sustain it. It's going to be a truly "great depression" this time round.
party like it's 1928! Seriously, how do we ever stop being a war economy?
michael jordan
http://sites.google.com/site/apolloguide/
In case you haven't noticed. Every single day TV news, the newspapers and radio will announce that "THE BOTTOM" appears to be near and sometime in the next few weeks things will start returning to normal.
Then some talking head will say..."So NOW is a good time to buy" meaning stocks, bonds, housing, trading cards or beanie babies or whatever other useless asset they're selling.
Sounds like an alcoholic announcing that he's going to quit drinking next week so it's ok to lend him some more money doesn't it?
Dean Baker has a good analysis of the so-called "stress tests" on his site "Beat The Press". Even on their own terms they are not that great.
The problem in our economy and the fundamental cause of the recession is not primarily a dearth of credit. It rather has its origin in the nature of production and where it has headed in the last three decades, artificially stimlated by market schemes which belie a fundamental lack of attention to the long-term well being of the vast majority of Americans in terms of basic infrastructure- energy, agriculture, education and industry. Simply reviving the balance sheeets of banks, if it isn't tied to a fundamental shift in the how and what of our business models will only set us up for a bigger fall in the end.
Look, if Krugman paid too much attention to the real problem he simply wouldn't be employeed as a columnist for the NYTimes. Just like Margaret Warner on PBS, if she actually knew anything about the situations she reported, she would be engaged as a reporter.
Great article again by someone who understands.
The comments on this site--particularly on this article--are shockingly naive, off-topic, poorly written, self-flattering, confused and totally useless.
The only comment I found that meets your description is your own.
"I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the civilized world - no longer a Government by free opinion, no longer a Government by conviction and the vote of the majority, but a Government by the opinion and duress of a small group of dominant men." -President Woodrow Wilson
“The issue which has swept down the centuries and which will have to be fought sooner or later is the people versus the banks.” --Lord Acton
“History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments by controlling the money and its issuance.” --James Madison
Krugman writes, "But what worries me most ... It's my sense that the prospects for fundamental financial reform are fading."
Yes, Paul, that worries me too, but I am more curious (and motivated) about that threat of Empire's inertia and suffocation of democracy than our president --- and apparently you.
“You can’t handle the truth”.
From ABC's “This Week” TV (5/3) —– Obama’s video clip, and Paul Krugman’s comment:
OBAMA: “I don’t want to run auto companies,” the president says. “I don’t want to run banks. I have got two wars I gotta run already; I’ve got more than enough to do.”
KRUGMAN: “I can’t predict, but right now, let me tell you, they really don’t want to run banks. They so badly don’t want to run banks, I think it’s actually kind of hamstringing their ability to deal with them. Because they don’t want to go where they just went with Chrysler on the banks. And this is definitely not a socialist-minded administration.”
Any intelligent person, let alone a Nobel economist, reading Naomi Kline’s “Shock Doctrine” detailing the history of the modern global ruling-elite Empire’s economic mechanism for smothering and diverting the disruptions of popular democracy, could not help but understand that the economic shock induced on 9/15 (08) with the overt decision to intentionally collapse Lehman was clearly the “second shoe dropping” (or more wryly ‘second shoe bomb’) after the 9/11 shock doctrine. As many in the ruling-elite ‘corporate financial Empire’ hiding behind the façade of its two-party ‘Vichy’ sham of democracy slyly acknowledge — “Never waste a crisis”.
And so, Paul, there should be no surprise that Obama did not publicly object to the quiet back-room legal tyranny of the economic Empire any more than the personable, Scotch-drinking Mbeki did not publicly object to the deals he had made with the ruling-elite economic Empirists of South Africa which collapsed Madela and the ANC’s ‘Freedom Charter’ from a serious and indivisible political-economic declaration of social/ist democracy into a rancid corporatist tourism “show”.
No, Paul, as Margaret Thatcher infamously said, “TINA” (there is no alternative) to the economics of empire. There will be no endearing call for ‘debt relief’, nor for ‘mortgage relief’, nor for ‘health care reform’, nor for ‘land (nor certainly asset) reform’ — despite the irrefutable truth that the GINI indexes of wealth and income inequality in our shining democracy on the hill are fast approaching those of South Africa, Chile, Russia and all the other success models of the Chicago Boys’ shock therapy for establishing flowering ‘democratic capitalist’ free market states (whatever that oxymoron means).
Like the dutiful Marine Commander that Gen. Smedley Butler was NOT, Obama is just too consumed and dedicated to fighting the wars that Wall Street and big oil started abroad for their Empire to worry about interfering in the domestic tyranny of their very same economic Empire at home.
Alan MacDonald
Sanford, Maine