- It is unclear what assets would be left to the banks, but representatives of those financial institutions have warned the members of the task force “that a bankruptcy would be very messy and everyone would lose — those of us who carry the debt, and those in the government who are trying to save jobs,” according to one banker involved in the negotiations who also requested anonymity because of the delicate nature of the discussions.-

Apparently the current market value on the debt is ~0.15/1.00 and they want 0.65/1.00. This group of debt carriers includes our old friends, the too big to fail.

Thus the bailouts.

Painful, but reality

AA

I don’t think you can ignore the banks. First of all, they don’t want to be ignored. Second there are no fixes to the economy without financing – and unless you propose putting the banks out of business – you need them for financing. Now, I think some should be put out of business – but that is not “ignoring” the banks.

My point on actual inflation vs. expectations: I agree with you that it’s silly – but that IS the Fed policy right now. They do not want to create inflation but they want to create inflation expectations. Now, you can create expectations without fulfilling them – that’s why we don’t call them promises. But as policy its already failed – banks would rather put their money in 0% treasuries than loan it. They must be expecting something other than inflation – probably deflation.

In theory, the policies you lay out would probably work – expect for the political reality on the ground. The public needs to wake up and demand action against the financial interests. They can’t ignore it any longer – it’s been going on way too long.

“You cannot fix the economy without a financial sector”

We have a financial sector. It is on life support – where it can stay, while we concentrate on fixing the underlying economy. The economy will lead the banks to health; banks will not lead the economy to health.

“Until that happens Obama is going to play it *safe*”

Yes… he thinks he has no choice. If he is really a ‘good guy’, then his gamble is that he can stabilize the economy, take his time to figure out regulatory changes, then implement the changes after the markets are less neurotic.

This is clearly the plan he seems to have taken with GM – and I suspect investors may think he will apply the GM model to banks. Note the seemingly different stories being told by bank stock prices and CDS prices on bank debt. So long as the banks can take down the entire economy with a panic, Obama has no bargaining leverage against bank bondholders.

“The government could not “invest” 700 billion into infrastructure, actually place the money into circulation – that would produce ACTUAL inflation – they want to produce THE EXPECTATION of inflation. It’s a big difference.”

Unfortunately, you can’t create the expectation of inflation unless you _really mean it_. And frankly, the reason we have disinflation expectations is because it seems that the US govt. doesn’t really mean what it seems to be saying.

As to actually spending $700+ billion on energy/environmental/physical/education infrastructure using the states as conduits, it could easily be spent (certainly over 2 years), and some inflation would result, and this would help end our current predicament.

“Easier to fix the banks when the broader economy is stabilized”?

If the health of the banks weren’t relevant to stabilizing the broader economy we wouldn’t be having a discussion (or a TARP). You can’t get to stabilization without coming to some kind of fix for the banks.

I agree, we don’t have a liquidity crisis, we have a solvency crisis. Can the US create anything of value that the rest of the world wants? If so, in excess of our consumption level?

If sour assets aren’t being undervalued – why would they need government support? Why would be they even be called sour?

You cannot fix the economy without a financial sector – the government is not going to step in and start commanding production and consumption. They don’t know how and no one would give the plan any confidence. Events could change people – but it’s not happening tomorrow.

So how do you get investment moving when capital quality is questionable, demand is falling off a cliff, and banks want to take no risk (e.g., only lending to “well-collateralized credit-worthy borrowers”). You don’t and there aren’t any easy ways out of this.

The government could not “invest” 700 billion into infrastructure, actually place the money into circulation – that would produce ACTUAL inflation – they want to produce THE EXPECTATION of inflation. It’s a big difference.

I think it’s all a bit naive: you can’t make the bad guys go away by wishing them away or ignoring them – either take them out or live with their demands. You can’t negotiate with financial terrorists.

I do agree that it’s a political problem – but there is no large-scale organized opposition to the banking and financial interests. Until that happens Obama is going to play it *safe* (for him, not the economy).

But it’s important to recognize that SJ’s argument is not an economic one really – it’s a political one. The essence is that as long as the oligarchs are in control, they will prevent any real reform from taking place. So, first break the political power of the oligarchs, then institute reform.

SJ’s arguments on the oligarchs are not so easily dismissed, but there are many reasons against attacking big banks _first_, here’s a partial list:

1) What evidence do we have that the incentive problem described by behind too-big-to-fail (moral hazard) will be fixed by cutting banks down to size? Instead of having a few big failures, we may end up with many many smaller failures (e.g. Great Depression, somewhat the S&L crisis). Certainly many small banks (Countrywide began very small, and grew rapidly) created some of our “innovations”…

2) I don’t see that spending Obama’s effort for 6 months on cutting down banks is the best use of what little is left of his political capital – and it _certainly_ will not help the economy in the short run. He might succeed, but at the cost of every other initiative on his plate – and those are simply more important.

3) It will be a lot easier to fix the banks when the broader economy is stabilized, since the markets are less likely to overreact to a federal initiative to take a big bank into receivorship. The market volatility is strengthening the oligarchs’ hands…

4) I don’t fundamentally believe we are in a liquidity crisis – there are plenty of banks lending, plenty of capital for well-collateralized credit-worthy borrowers. Just no capital for highly leveraged business borrowers (commercial property, small businesses)… Even SJ admits there’s no liquidity crisis (in his arguments that the sour assets on banks’ books really aren’t being undervalued by the market). So if there is no liquidity crisis, why do we have this incessant focus on spending so much time and effort fixing banks _first_, rather than fixing the economy first? (Still no response on this question…)

5) We are in a demand crisis (with modest deflation in spite of semi-aggressive monetary policy) and a structural production crisis (we produce stuff no one wants or needs). Why are we spending precious assets rebuilding an industry that everyone thinks should be smaller, when we have insanely huge needs to build sustainable energy/health/education/physical infrastructures?

Or, to put the problem differently, ask yourself this question:

If the government had invested 700 billion in matching grants to states and local governments for investment in energy projects, infrastucture, education… and funded this partially through Fed purchases of T-bills? Would things look as bleak as they do today?

What if the Govt. matched that 700 billion by borrowing from the Fed, and extending the states 2 trillion dollars worth of 0.25% interest loans?

Or, to use a different metaphor… the economy is a big bathtub with a hole in the bottom. Water (aka, money) is flowing out the hole (insolvency which is destroying debt and asset values). Rather than plug the hole, we keep pouring in more water.

So SJ is certainly right about too-big-to-fail; but SJ comes to this issue wearing IMF-colored glasses. He has thus taken it up as a crusade, and the too-big-to-fail narrative is picking up steam – heralded by people like Henry Blodget – who would absolutely love to see Obama spend his political capital attacking banks instead of fixing the real structural problems with this country.

Secondly, does the PPIP process prohibit or prevent the establishment of special entities and shadow companies to launder (pillage) huge chunks of the 92.5% of government sponsored taxpayer money offshore?

Lastly – how can there be any hope of stabilizing the financial system hope if the government colludes and participates with the toobigtofail banks in the distorting, cloaking, or stiffling information critical to the markets, shareholders, and consumers?

Without transparency and accountability – the financial system is certain to be corrupted.

I only recall brief mention of same during AIG Senate Finance Committee hearings, i.e., that banks in question (or was it AIG?) have passed ‘competition tests’.

Is thwarting competition not inherent in what defines or drives banks/corporations too big to fail?

Little Timmy just caved during the congreesional hearing and said that some of the bailout-banks may be allowed to give back the funds early.