Is Tim Geithner Paying Attention To the Global Economy?

In an interview that will air Sunday on ABC, Treasury Secretary Tim Geithner says, “”We have much, much lower risk of [a double-dip recession] today than at any time over the last 12 months or so … We are in an economy that was growing at the rate of almost 6 percent of GDP in the fourth quarter of last year.  The most rapid rate in six years.  So we are beginning the process of healing.”

The timing of this statement is remarkable because, while the US is finally showing some signs of recovery, the global economy is bracing for another major shock – this time coming from the European Union.

The mounting debt and deficit problems in Greece might seem relatively small and faraway to the US Treasury – concerned as it is with China’s exchange rate and the ritual of G7 meetings, and likely distracted by the major snow storm now hitting Washington DC.

But the problems now spreading from Greece to Spain, Portugal, Ireland and even Italy portend serious trouble ahead for the US in the second half of this year – particularly because our banks remain in such weak shape.

Greece is a member of the eurozone, the elite club of European nations that share the euro and are supposed to maintain strong enough economic policies.  Greece does not control its own currency – this is in the hands of the European Central Bank in Frankfurt.  In good times over the past decade, this helped keep Greek interest rates low and growth relatively strong.

But under the economic pressures of the past year, the Greek government budget has slipped into ever greater deficit and investors have increasingly become uncomfortable about the possibility of future default.  This impending doom was postponed for a while by the ability of banks – mostly Greek – to use these bonds as collateral for loans from the European Central Bank (so-called “repos”).

But from the end of this year, the ECB will no longer accept bonds rated below A by major ratings agencies – and Greek government debt no longer falls into this category.  The market can do this kind of math in about 20 seconds: If the ECB won’t, indirectly, lend to the Greek government, then interest rates will go up in the future; in anticipation of this, interest rates should go up now.

That is trouble enough for an economy like Greece – or any of the weaker eurozone countries that have been known, for some time and not in an endearing way as the “PIIGS”.  But paying higher interest rates on government debt also implies a worsening of the budget; this is exactly the sort of debt dynamics that used to get countries like Brazil into big trouble.

The right approach would be to promise credible budget tightening down the road and to obtain sufficient resources – from within the eurozone (the IMF is irrelevant in the case of such a currency union) – to tide the country over in the interim.

But the Germans have decided to play hardball with their weaker and – it must be said – somewhat annoying neighbors.  As we entered the weekend, markets rallied on the expectation that there might be a bailout for Greece (and all the others under pressure).  But, honestly, this seems unlikely.  The Germans hate bailouts – unless it’s their own banks and auto companies on the line.  And the Europeans policy elite loves rules; in this kind of situation, their political process will grind on at a late 20th century pace. 

In contrast, markets now move at a 21st century global network pace.  This is a full-scale speculative attack on sovereign credits in the eurozone.  Brought on by weak fundamentals – it’s the budget deficit, stupid – such attacks take on a life of their own.  Remember the spread of pressure from Thailand to Malaysia and Indonesia, and then the big jump to Korea all in the space of two months during fall 1997.

Tim Geithner and the White House may feel they must stand aloof, waiting for the Europeans to get their act together.  This is a mistake – the need for US leadership has never been greater, particularly as our banks are really not in good enough shape to withstand a major international adverse event (e.g., Greece defaults, Greece leaves the eurozone, Germany leaves the eurozone, etc).

Yes, we subjected our banks to a stress test in spring 2009 – but the stress scenario was mild and more appropriate as a baseline.  Many of our banks – big, medium, and small – simply do not have enough capital to withstand further serious losses (think commercial real estate).

As the international situation deteriorates – or even if it remains at this level of volatility – banks will hunker down and credit conditions will tighten around the US.

And if the European situation spins seriously out of control, as it may well do early next week, the likelihood of a double-dip recession (or significant slowdown in the second half of 2010) increases dramatically.

By Peter Boone and Simon Johnson

84 responses to “Is Tim Geithner Paying Attention To the Global Economy?

  1. I think if these banks and big companies are trying to see this president fail. So if there is a “double dip” recession they would be the cause and everyone who supports their efforts to see this country fail. Just note that if that is the plan be prepare to reap what you sow.

  2. In my more conspiracy-minded moments, I’ve wondered if that’s why TARP was passed in the first place; create a financial crisis and saddle the new Democratic administration with that financial crisis so that liberal policies cannot be enacted, increasing the chance that Republicans will return to power quickly despite the fail of the Bush years.

    But conspiracy theories don’t get you far in the real world.

  3. Perhaps the lack of concern stems from our ability to continue borrowing from China; the dollar is more attractive if there aren’t other viable options.

  4. Ever since our administration decided last year to (literally) buy the banks some time and help them “earn” their way back to solvency, it has been politically invested in (1) giving the impression of recovery regardless of what is really taking place, and (2) downplaying the banks’ persistent exposures. For this reason, they will not acknowledge potential problems until they are right on top of us, let alone develop plans as to how to deal with them. It’s kind of similar to how, with the previous administration, the credit crisis was “contained” until we were merely days away from the complete collapse of the financial system. I’m sure they believe the sovereign credit crisis is contained within Europe.

    It’s hard to blame Germany, however, for being relectant to throw money at a bloated and corrupt government.

  5. “Many of our banks – big, medium, and small – simply do not have enough capital to withstand further serious losses (think commercial real estate).”

    Rather than taking further measures to keep reinforcing banks (at taxpayer expense) to preserve the precious credit system as the economy implodes, perhaps we could actually try to keep the economy from imploding?

  6. When the dust settles, expect third economic status of many of these countries, maybe including the United States. Could the IMF bailout the U.S., dipping into their dwindling coffers? It will be interesting to see if countries like Greece, Spain and Portugal take up similar options of the Latin America countries did by the early 1980s. Domestically, President Obama takes his talking points from Mr. Geithner, instead of the other way around (as reported at the G7 by Financial Times – “Tim Geithner, the US Treasury secretary, will discuss American plans to impose a fee on banks to recoup bail-out costs, and the “Volcker rule”, about restricting commercial banks’ ability to engage in proprietary trading.”). It was rightly pointed out last evening in Paul Solman’s continuing interviews on the financial crisis, this time with David Stockman that “the party is over”, that government bailouts only rewards the lack of financial discipline and everything else that has gone wrong – and I would also add, as has been enumerated continuously by this awesome blog; it’s definitely a case of “hurry up and wait” for the markets to correctly get it right the next time even it’s raining cats and dogs out here.

  7. ‘US Leadership’? Just exactly what does that mean? What are the possible alternatives for the US? We bail them out? Ha! Ask US banks to take on high sovereign risk? Pressure other EU countries to bail them out? Germany already has maximum self interest in seeing PIIGS through all this, how is any US ‘leadership’ going to change the equation?

    I am no fan of Geithner, but this is one time I’d cut him some slack.

  8. Banks would not trade off short term results, as extreme as a double dip would create, to achieve a long term objective.

  9. The most bloat is in the retirement/benefits system, and Germany suffers from that too. US as well – In US municipal govts, 25-30 years employment buys a compensation package that is currently above private sector for comparable hours worked & education, and retirement at age 55 (with a bachelor’s degree to start) that carries through with health insurance and inflation-adjusted benefits (better than inflation with health care) for an average of 23 years afterwards (life span of 78). Such benefits packages in the private sector have vanished – a hidden wage cut.

    That’s the supply side argument – and it’s a serious one. The demand side argument still points at excess capacity and unemployment. We have both, but the demand siders (Krugman) don’t seem to get the issue with ongoing debt. Structurally, we have the issue that elders did not save and health care costs (along with range of services and length of support) are rising, meaning that they can’t draw on owed obligations to sustain consumption (meaning that they need support from taxes, meaning that we’ll need much higher tax rates to support them unless they go back to work, but many skills have decayed due to years in retirement, and some are in poor health). But right now, taxes are a non-starter, so we’re covering consumption with debt (future tax load), even though the FUTURE relative base of tax payers will be even smaller.

    There are ways out, but they are so politically toxic to the groups in power that I cannot see any solution emerging until the crisis hits squarely (e.g. Greece), but the US position as reserve currency will trump that for a long while. Threats to the world economy cause such a huge aggregate demand shock that we see “flight to safety”, and massive carry trade unwinds (we’re now in dollar carry trade unwind 2.0 – yay). Meaning the dollar will probably be able to go further into debt than any currency in the history of the world before it really blows up, and then all hell will break loose.

    Consider this – if the US govt were to formally default (hopefully it will inflate, but I can imagine a gridlock that actually causes a formal default), this could actually INCREASE the demand for dollars as a settlement currency due to massive deleveraging.

    We’re going to need to raise taxes, cut transfers, cut retirement benefits, control health care, and prevent an aggregate demand implosion by using aggressive monetary policy AND deploying massive investment tax credits all at the same time. Which is possible, IF we had an economic dictator. Not possible in the US political system.

  10. The problem is not the strength of the banks, it’s the lack of a systemic risk regulator and the lack of resolution authority.

    If Europe rises to the level of a systemic threat, the only option the United States would have is another AIG bailout – which was: a too-late diagnosis of an existent systemic event and a country with no resolution authority over systemically important entities.

    And Geithner and Bernanke started telling us this when Geithner was still the President of the New York Federal Reserve.

  11. And don’t forget the brewing storm in the China lending story that is now unfolding. The housing bubble in Australia is yet to pop, too. Plenty of big shoes to fall before this over.

  12. A short but definitive Analysis of what is Wrong With America Today:

    “Democrat’s Economic “Assumption-of-Death”.

    “The fatal flaw that produced stagflation in Europe in the 20th C is taking hold of America, mistakenly promoted by the erroneous and perverted economic policy – or non-economic policy – of the Obama administration.”

    If you are a VOTER, read on pass captions like this:
    ……“All good comes from economic success, and all success comes from the creation of profits. There is no stronger disincentive to profits than taxation.”…….

    They are saying,………no need to punish “profits”.

    All good Americans should debate and decide on this thesis at;

    http://www.robbingamerica.blogspot.com

    Think about it until 2010…………there is still time “to survive”!

  13. Excellent points except for the end. We don’t need a dictator we need a leader with brass balls. For starters it would be great to have Volker as treasury secretary, or at least any one of the other economists that understand the problem and the solution. Obama is a coward, he cannot even get his appointees through the Senate much less an economic agenda. Harry Reid is a coward as well. We need strong men like LBJ and FDR or Teddy Roosevelt. You don’t need a dictator. Remember that Clinton raised taxes his first 100 days in office and he did not have 60 votes in the senate. What we lack is leadership. Problem is that great leaders are rare. If our country was run with the same energy and passion that Steve Jobs runs Apple Computer we would be out of this mess. The problem is that everyone wants to “be” a leader – but they don’t know how to lead.
    Obama should have fired Bernanke & Geithner the moment he discovered the AIG cover-up. Like Bush, Obama is loyal people who fail.

  14. Ahh yes, more support for redistributing wealth upward.

  15. How can you say: ‘…double dip’ when you never recovered in the first place.

    And we’re not in a recession but a breakdown crisis of the entire Anglo-Dutch imperial monetary system.

    That means sovereign defaults, massive un-employment (permanent), and un-governability in Western countries.

    Articles like this really hurt us because you marginalize and underestimate the crisis.

    This is not some typical ‘business cycle’ but a segway into a New Dark Age.

  16. Throughout history, an unified Germany has always spelled trouble for the rest of the world.

  17. theotherguydidit

    The “bloat” you refer to was a contract between employer and employee. Civil service retirement is not a gift, it’s defered income which is taxable.
    Having retired at 50, I was back to work at 51.From the government sector to the private sector. Not into a related field either.
    I pay into the social security system from which I will received a benefit reduced by 90%. The hidden tax former civil service government retirees pay to sustain social security.
    My health insurance is paid in thirds. I pay a third, the union I belong to pays a third, the government pays a third. It’s a PPO administrated by a not for profit health care organization. There’s a deductable and a co pay.
    Civil service retirees did not cause the banking system to fail. The banker’s and their cohorts did it all by themselves.
    The message should be the Powell Doctrine. You broke it, you own it.

  18. “Structurally, we have the issue that elders did not save”

    The problem is, unless we force them somehow, they never will. My rabidly conservative father was the first to take government aid and charity when he hit retirement age. Why? In part because he had raided his retirement 20+ years before he needed it. He certainly never saved a dime toward it. Most Americans are no better (in part because they can’t afford to, but also in part because it’s more pleasant not to).

    So unless we can force people to save, they won’t. If they won’t then we have a decision: Do we let them starve or die from lack of healthcare, or do we suck up an pay for them?

    So far the answer has been, appropriately I think, suck up and pay.

    On the other hand, if these seniors started hitting the wall with no safety net, maybe their children (like me) wouldn’t take it for granted that someone else will come to rescue them. Maybe we would start seeing ourselves of having the obligation to return to our parents what they brought to us (it used to be the norm). That might even help the social fabric by strengthening long term family bonds. Right now, I think we are (me included) pretty selfish.

    I don’t know the answer. At the moment I look at this as a “compact” – I take care of the seniors and then when our kids grow up they take care of me and so on. It’s like public school – each generation has an obligation to the previous and the next. Therefor we must find a way.

  19. I am fortunate to live adjacent a conservation zone and none of the wildlife seems to appreciate our “crises” which reminds me that our economy is an artificial construct. We can make it work.

  20. Bingo….

  21. I do agree with you about the social contract…the other part about saving is interesting because the returns have been so lame…It is clear that Wall Street has seduced the public with the 401ks because an investment in Treasuries would have been much more profitable.

  22. ” ‘US Leadership’? Just exactly what does that mean? ”

    That’s what I was thinking. Not only are we broke, but we’re probably the ones who did the most to cause this latest debacle.

    Wait one, maybe an innovation, like a triple looped FX inverted Yuan/Peso/rouble arbitrage long-short derivative is just what they need… stop any panic by freezing them up in incomprehension…

  23. Celebrate the “all good” coming from profits on bogus medical insurance plans that renege on the sick and injured.

    Celebrate the “all good” coming from profits from processed junk food that create obesity and other health problems in the customers.

    Celebrate the “all good” coming from profits on innovative “financial products” that allow looters to operate on a vast scale.

    Celebrate the “all good” coming from profits from over-sized fuel wasting SUVs ample enough to transport obeso families (with their often obese dogs).

    Celebrate the “all good” coming from profits earned by refering people to medical testing facilities owned by the refering physician, for unneccesary sometimes dangerous tests.

    Celebrate the “all good” coming from the all encompassing good coming from not having to deal with external costs.

  24. I call BS. Obama’s words claim he’s not captured by the banks, but his actions prove he most definitely is.

    It doesn’t matter which party’s in control; the banks paid good money for this government, and damned if they don’t own everyone in it.

  25. I call BS on this conspiracy theory. Obama’s words claim he’s against the banks, but his actions make his captured status 100% clear.

    The banks paid good money to buy the best government they could get, and damned if they didn’t get it.

  26. Oops, somebody delete this one. I double posted.

  27. Of course we’re headed for another recession. The minute the price of oil goes significantly over $100/barrel in another 6 – 12 months, you watch everything fall apart just like it did a year ago. Sure the financial system needs reform, but they are not the base problem. It’s really only when oil is too expensive to take advantage of cheap labor anywhere in the world that the trouble really starts.

    Sure there’s lots of oil we can scrounge around for, but sucking up the Alberta tar sands or miles under the ocean doesn’t give you gasoline for less than $4 a gallon. And then one must assume that the world will put no price whatsoever on carbon emissions. Unlikely.

  28. NonConformist

    Exactly, he who inflates the bubble should be responsible when it bursts. It was not a perfect storm, it was a perfect con. The financial/ruling elites knew what they were doing and knew their lackeys in Congress and the WH would have no choice but to bail them out with taxpayer money. I believe they call that extortion. Now they get to go around and gobble up smaller, weaker banks, houses, and commercial property at bargain basement prices. Feel like you’ve been conned? Well that’s because you have been. No biggie, it’s just been, and continues to be, the largest re-distribution of wealth in the history of the planet. It’s so big, Goldman Sacs and JP Morgan Chase are now fighting over it. Greed is such a great motivator.

  29. <>

    http://www.boston.com/business/personalfinance/articles/2010/02/06/for_savers_low_rates_are_matter_of_high_interest/

    I am so tired of this crap. Many citizens played by the rules; saved, invested in their homes and children and only got into debt when recession after recession punched them in the face. They re-invented themselves, sent second family members to work, diversified their skills and put themselves part-time through college. They paid into a system that used that money for what is was not intended. That vast 401K pool supported a bubble that gave us little in return.

    As far as bloat in the government sector it is no different than the private sector.

    Give your hard working fellow citizens more respect. They have added more value to this country than most of the CEO’s on Wall Street.

  30. Insane behaviour from the ECB. The best thing that you can say about it is that it is gross stupidity.

  31. StatsGuy,

    I agree with most of what you said, but in a sense your argument reveals the wisdom of Germany’s reluctance in bailing out other countries (if indeed that is the case).

    Suppose you are a developed country in the position of bailing out other, smaller developed countries now. You look around and realize that most developed countries have their own versions of epic fiscal gimmickry that will eventually have to be dealt with (with painful political and economic consequences), your own country included (although perhaps to a lesser degree). You realize that the cost of the current crisis is actually establishing the initial conditions for your own reckoning, and initial conditions matter…

  32. I agree we don’t need a dictator, however concerning Obama not gettin appointments thru you must have missed what the esteemed Senator from Alabama (Shelby) has been doing so that he can bring the pork home. The Senate with its arcane rules is due a large part of blame, and the fact that so many are bought off from corporate interests should be quite obvious. They need to call the Republicans out on their faux filibusters. Put some sunlight on these guys!

  33. No panic. The USA can stay home, and lick its wounds, mostly self inflicted. The French and the Germans know what they are doing. The long head and architect of the Euro, Jean Claude Trichet used to head the Banque De France, with its Franc fort policy… Now he works from Frankfurt (=Frank-fort).

    Greece’s problems are not such a bad development… For France, Germany, and their immediate satellites.

    Indeed the Euro was way too high relative to the Sino-American currency. No doubt the sneaky ones in the arcane vaults of European government monetary and economic policy are delighted to see this “problem” unfold throughout Southern Europe. I guess the Euro will have to fall from its mighty perch, how sad for China and the USA!
    After all, after talking softly, for years, it’s time to use a big stick.
    One can, and ought to crack down on, Greece, China and the USA. That Northern Europe’s discipline shall be imposed on Southern Europe is good. Just as it is going to be good to dismantle the plutocratic infection in Britain.

    Americans and Chinese did not exert moderation, they kept undercutting Europe with their competitive devaluations. After the dismal Chinese show of raw asinine brutality at Copenhagen, Europe has apparently decided to play hard ball. Good: the USA and China will suddenly that Europe exists, and can be mighty their way, by letting its currency go down. I tip my hat. It’s a wolf hat I use in the mountains, among the snows.
    PA

  34. How will this be good for Greece?!

  35. Yeah, since the banks lending other people’s money to borrowers to consume more (homes) & invest in nonproductive assets (homes) for quick profits got us where we are now. In deep $hit.

  36. Yeah, since the banks lending other people’s money to borrowers to consume more (homes) & invest in nonproductive assets (homes) for quick profits got us where we are now. In deep $hit.

  37. And why didn’t the banks use other people’s money to invest in the real, productive, job creating economy? Simple. No quick profits.

  38. statsguy,

    Yeah, since the banks lending other people’s money to borrowers to consume more (homes) & invest in nonproductive assets (homes) for quick profits got us where we are now. In deep $hit.

    And why didn’t the banks use other people’s money to invest in the real, long term, productive, job creating economy? Simple. No quick profits.

  39. Statsguy,

    The US cannot formally default. It is impossible. It may inflate or devalue its currency. But it cannot formally default. Its debts are dollar debts.

    The policy prescriptions in your final paragraph are mutually exclusive. You cannot reduce total spending and maintain it at the same time, regardless of political system.

    If consumption is covered with government debt to maintain AD, it’s not such a big deal–since that debt is an asset of the private sector.

  40. They don’t give a $hit about the long term viability of the economy that produces all their expensive cars, homes & clothes. And which produces all the food, clothing, shelter, transportation, energy & health care for them & everyone else in this country.

  41. The German leadership is very destructive. They syphon AD from Southern Euro states via current account surpluses, and any readjustment is prevented by the intra-EMU exchange rate peg.

    Any counterpart states must run government or private sector deficits to accommodate, or suffer the recessionary consequences. Now the ECB is going to stop accepting Greek debt as collateral and increasing the pro-cyclicality of the Greek policy response, with the inevitable consequence of inducing further deterioration in its budgetary position. Not wise at all. Stupid at best, at worst, well…

  42. substitute california wherever you read greece.

  43. But Greece’s policy response is likely not practicable anyway, which is the moral of debt intolerance.

  44. Fri Feb. 05 2010 – CTV News – excerpt

    “On Friday, Portugal’s opposition parties defeated a government austerity plan and passed their own bill allowing the country’s autonomous regions to rack up even more debt.”

    http://tinyurl.com/yl8urf3

  45. Good!

  46. Bond Girl,

    I don’t understand that sentence.

    In any case, if the Greek tries to reduce its deficit it will reduce AD, reducing total income with the knock-on effect of reducing government revenues and increasing automatic stabiliser payouts.

  47. Sorry, that was a reference to Reinhart and Rogoff’s sovereign debt research. (They were looking at serial defaults in emerging markets, but advanced countries are starting to look risky by comparison these days.)

    The basic idea is that countries get themselves into a cycle of distress by borrowing rather than addressing institutional problems. The countries that can break the cycle are the exception not the rule, which goes back to StatsGuy’s observation that when things get to this point, the political orchestration involved in righting a country’s path is beyond the democratic process. We are basically watching the Greek government stumble upon that reality.

    I guess I am not inclined to see Greece as an underdog here. If you bail out a country, do you fix it? (If you bail out a bank, do you fix it?) Do you think Greece is entitled to a bailout because Germany does not play well with others?

  48. The implication of what you are saying is that a more serious recession will be better for Greece’s political system. This seems very optimistic.

    It also seems rather cruel.

    If you bail out a country, do you fix it? No. America bailed out itself. Is it fixed? No. Would you rather have unemployment at 25%–would that “fix” it?

    In any case it is irrelevant to the logic of recessions. Greece will not reduce its government deficit by suppressing AD at this time. The EU is basically damning Greece to long-term stagnation and a totally unnecessary and socially harmful loss of output.

  49. There’s an assumption amongst IMF and EU bankers that the world’s workers want and can’t wait to join the capitalist treadmill. Cultures are not the same, nor are life values. Mediterranean cultures – stereotypically – want to enjoy life. Forcing people into a mono-cultural vision of dog eat dog capitalism is going to come under strain in any crisis. Same with much of Asia, and forcing Asians to become credit loving consumers. The ‘values’ of capitalism are only loosely permeated throughout the world economy. The world’s banking elite are still trying to make everyone their debt slave.

  50. Because capitalism is about making money.

    That stuff about fulfilling consumers needs is a tangential relationship. It’s not central to the system.

  51. A gyroscopically balanced two-wheeled electronic people mover is a really inefficient means of transport to a new dark age.

  52. Martin Fetherston

    PB/SJ – I don’t agree that the IMF is necessarily irrelevant to Greece’s situation. The Fund, as you surely know, has lent many times to members of currency unions (notably the CFA franc countries). The issue rather is that the EU big boys seemingly aren’t prepared, at least for now, to accept the loss of face that an IMF intervention for Greece would entail. But in the end they may figure out that this is the least worst option for them.

  53. February 5, 2010 – Business Week – excerpt

    “Spain’s government says it is using emergency legislation to rein in its air traffic controllers, who earn up to 900,000 Euros ($1.2 million) a year in a country suffering a recession and nearly 20 percent unemployment.

    The controllers are technically civil servants, but they signed an agreement in 1999 giving them autonomy and control over their salaries.”

    http://tinyurl.com/ybc3pun

    Pass the Sangria.

  54. Yes they knew it because the whole system is a scam, teh federal reserve bank is a for profit bank backed by taxpayers, the bankers have been taking control of the world since the time Jesus threw them out of the temple for hiking up the price of the silver shekels which was the only coins the temple would take, because all others had roman gods on them.. If you want to watch a good film on how the bankers have been ripping you off for a thousand years watch money masters, it explains how fractional reserve lending was invented and much more.

  55. In a normal country, not just a eurozone, all those from Kentucky (Greece) with initiative would be moving up to Massachusetts (Germany) and those who remain in Kentuchy would count on Massachusetts to send some money … or remittances…otherwise the union would not hold together.

    It is going to be very interesting to see if Germany really appreciates that some of the worse of EU countries are the ones keeping the euro low, helping it to be able to export, and that this service has to be paid for… or otherwise Germany will have to see in its future a super-strong D-mark… killing its export industry, that is, unless they do what China does and finance the importers… which would get us back to square one.

  56. Simon says “Many of our banks – big, medium, and small – simply do not have enough capital to withstand further serious losses”

    Not surprisingly, especially if we get into sovereign problems, because while the banks had to hold a meager 1.6 percent of capital when doing business with triple-A rated clients they did not have to hold any capital at all when lending to A-rated governments… all the courtesy of pro-government regulators like those in the IMF who never spoke out.

    If you deposit a 100 dollars in your community bank that banks needs to put up 8 dollars in capital in order to lend 100 to your neighbor, a small businessman, but needs only 1.6 dollars in capital if lending to those rated AAA who already are getting their funds cheaper; and need zero dollars in capital if relending that money to the Government. If you think this is ok I am sorry… because I find this regulatory discrimination an abomination that is interfering with what little rationality there is in the market.

    It is going to bite us all… and let us hope that at the end of the day we learn the lessons and not settle with finding ourselves some convenient scapegoats.

  57. DakotabornKansan

    Public despair is possible and that is good politics. Resurrection of the wrecking crew as the audacity of hope fades.

  58. So we peripheral countries who have been providing additional stimulus to your economy for years, can we get a little kick back in our hour of need?

    Ah, no, no: it wouldn’t be right, you see. Better have a recession. Builds character.

  59. bryanfromhouston

    This would work, but the numbers of baby boomers kind of make that social contract a problem. And it’s not just the U.S., China and Europe will all be facing the same issue. Further, it’s non-binding…some heartless blokes won’t spend a dime on their folks and so what happens to those parents…not to mention the people without progeny.

  60. Are you from Greece?

  61. If you still believe there is any policy difference between the two parties, its a fantasy world. Fiscal and foreign policies remain the same irrespective of who the president is. And that is the biggest problem here. Its the congress which passed the TARP under democratic majority. Its the monetary policy, borrow and consume, unrestrained spending without bothering about the consequence (by the government)that brought us to the situation we are facing. The bail out has only postponed the inevitable. If the banks were let go at that time, the system would have been cleansed of the bad assets and malinvestment. There would have been a short term pain but a more robust recovery.
    By bailing out we have achieved nothing. All the bad assets on the balance sheets is camouflaged by altering the mark to market accounting gimmick. The governments the world over have created so much money without any backing, its created an illusion that the worst is over and system has stabilized. Alas, the worst is yet to come.
    Its the elitist policy to protect the bank cartel. We seem to learn nothing from the past. We are heading towards total disaster.

  62. Tis true. The banks are crashing the markets and wiping away any party or govt that would enforce reform and regulations on them. They have the money, time and power to do it. One can imagine what govt systems will arise in the aftermath – hint – take a look at our current Republican Party – now multiply that by the nth power.

  63. Peter Boone and Simon Johnson wrote;

    “But the problems now spreading from Greece to Spain, Portugal, Ireland and even Italy portend serious trouble ahead for the US in the second half of this year – particularly because our banks remain in such weak shape.”

    Sunday 7 February 2010 – Observer – excerpt

    “Countries such as Spain and Greece are emblematic of the problem. They lack both the physical and human infrastructure needed to make themselves more competitive, yet it is in those areas – spending on roads, universities and skills – that the axe will fall. This presents a problem not just now but for the future, as the ageing baby boomer generation presents Europe with a steady decline in its working-age population.”

    http://tinyurl.com/yhmsouf

  64. Behind the scenes, Tiny Tim is praying for a resolution that’s unlikely, or, more probably, just spouting his same old, same old in the face of contrary evidence. He always seems one step behind and therefore makes any kind of proactivity either unlikely or impossible. Ben has his fingers crossed, and is unlikely to make any kind of commentary on what’s happening in Europe, or the overall degenerative state of our own internal financial community, which can’t go on “Goldmaning” things as they have for the past year. I’m afraid that they won’t be able to trade their way out of this one, with toxic acidity about to etch their fate downward.

  65. Much of the modern finance industry is a criminal conspiracy, or the result of one. Started under Reagan with deregulation as a religion (“Rules? We don’t need no stinkin’ rules!”) the conspiracy achieved its greatest goal under Clinton, general deregulation and the repeal of Glass/Steagal. For this, Citibank paid Robert Rubin $125 million. (Why is he not in jail for this?) The same crew paved the way for the phenomenon known as “Too big to fail”. If you don’t speak Latin, let me translate. Too Big to Fail means: “We’ve you by the balls. Do something we don’t like, and we’ll bring it all down.”
    It’s time to break up the Big Banks, starting with Goldman Sachs. If Obama won’t, I’ll vote for the guy who will.

  66. My crystal ball is as opaque as they come. But I think it safe to cast doubt on one of the presuppositions behind the authors’ latest Cassandra prediction. As reluctant as German authorities might indeed be to bail out Greece, Spain, Portugal and any other Eurozone countries overwhelmed by debt, said authorities will look for ways to prevent sovereign debt from defaulting in the EU if they so much as have an inkling that a banking crisis would otherwise ensue. German politicians and technocrats will do what they can to prevent any such crisis from taking place. The first half of the 20th Century in Europe continues to inform what Koselleck calls “historia magistra vitae”, not to put too fine a point on it.

  67. Vote? Wake up and smell the coffee.

  68. Michael Turner

    Oh, but here’s the clue about the coming narrative (and I’m surprised nobody picked up on this):

    “We are in an economy that was growing at the rate of almost 6 percent of GDP in the fourth quarter of last year. The most rapid rate in six years. So we are beginning the process of healing.”

    Now, Timmy’s just *gotta* know: about 4% of that 6% spike was only inventory bounce. After all, it was deemed such in a widely publicized report from Goldman Sachs, no less. I’ve been given to believe he has contacts with that firm. (Or if not: surely he reads the financial press?) But he’s also probably noticed: nobody’s paying much attention to that analysis. Rah, rah, healthy growth has returned.

    So when the bounce is over and growth falls back, he’ll be able to say, “Oh, we had good growth, everything was fine, but then the Eurozone went and imploded on us. Not my bailiwick. Not our fault. Not this time, anyway.”

    In times like these, it’s always good to have somebody to blame. Besides yourself and your friends, I mean. The poor Greeks, you have to feel for them, but we’re talking about political survival (in *America*) here. So it’s not going to be about doing the right thing, unless that’s also conveniently the *convenient* thing.

  69. TARP was passed in October 2008. Not a democratic majority in place.

  70. Ah, at last somebody with their eyes open. The “crisis” in the capitalist system is not that it pays it workers too much and allows them to retire with some dignity, it is because of the the unbridled greed of the corporations and the greed of its managers. Surely we can devise a system that caters for the well being of all our citizens rather than a handful of greedy parasites.

  71. Actually, we can (technically) formally default. It would involve Treasury floating a bond auction, with a bid/cover ratio less than 1. (That means, no bidders even at any “price” or interest rate.) And, it would mean the Fed not covering the gap. I would hope this is unlikely – but I can imagine a gridlock so intense that it could happen.

  72. The US government can always supply dollars.

  73. While it’s quite clear we need to address TBTF and compensation in the finance sector (and wage disparities), it’s also quite true that consumption needs to go down (the trade deficit is proof), and that means real wages need to go down, and the only way that can be achieved is either by growing the real economy fast (we can hope) or by cutting real wages. The best way to accomplish this is monetary adjustment (inflation). And the most resistant sectors to real wage cuts are those with contractually guaranteed wages – in particular retirement transfers that are indexed to inflation. (Are your wages indexed to inflation?)

    To the extent that wages of current employees are cut but wages of retirees/medicare beneficiaries etc. are held steady, cutting the national consumption gap will mean a massive consumption cut for currently working employees (accomplished through huge tax increases) to preserve the consumption power of the boomer generation (which has a huge savings gap).

    While the boomer generation might claim “we were promised this, the nation owes this to us”, recognize one truth:

    When the “nation” promised those benefits, it was controlled by the boomer cohort – which did not save. They assumed 8% annual growth in equity values to fund future pension payouts. They assumed housing values would go up forever, and built houses with constantly increasing square footage. Thus, they did not fully fund those pension systems, and NOW those pensions have a huge gap – your argument presumes that the current productive cohort should harshly cut its own consumption (e.g. increase taxes massively) to pay for a gap that was incurred by the previous cohort – and thus allow the previous cohort to preserve its FULL consumption.

    To the extent the current “capitalist” system is failing its elders, much of that is because its elders designed that system. Now that they’re starting to realize their mistake, their response is to demand that the next generation pay them their FULL benefits even though the real economy that they built cannot generate those benefits.

    The new cohort is starting to flex its political muscle, and will not agree to that. Hence, political gridlock.

    Nothing exemplifies this contradiction like the phrase:

    “Keep your government hands off of my Social Security!”

    The inevitable outcome? Govt will go into massive debt rather than raise taxes or cut transfers. I must question whether American democracy can force the politically nasty tradeoffs that need to occur. We are rapidly approaching national insolvency.

  74. The Democrats won both houses of Congress in 2006.

  75. This crisis in The Eurozone is both real and highly dangerous through contagion. Recall the effects of Latam in the 1980s and the Asian currency crisis of the 1990s. Greece, now the Iberian countries not to mention Ireland are threatened with similar far reaching consequences.

    The ONE really serious threat to the Eurozone and the stability of the € is and was ALWAYS that of a prolonged economic downturn, with differing policy stances required for the member states, yet unable to be enacted. You cannot apply the same approach to Germany as say to Greece. This was the great polemic in the early 1990s about political union being a necessary precondition for EMU – monetray union. There is no mechanism in place for fiscal adjustments without national Treasuries involvement. One size fits all monetary policy just does not work. The ECB needs to find a mechanism and FAST to address the Greek problem before it blows up. The effects will not be confined to Europe but ricochet around the world including the US. A great deal of statitical fudging has always been present in Europe- they have never had their accounts signed off as being a true and accurate reflection of the state of European finances. The reason that the UK has not joined has always been that it would have locked £ sterling into a rigid system that allowed no flexibility of FX rates. Precisely what happened in 1992. We may have learned one lesson, even if we have forgotten many others – there we are not alone! The US cannot ignore this whilst preoccuppied by domestic policies as it will result in dislocation and damage to world trade and jobs on both ides of th Atlantic. I suggest that it is worthwhile looking at the lock-up that occurred as a result of Britain’s attempt to restore the Gold Standard. it is a sobering even frighteing experience and only a rearmamnent boom brought about the end of the Depression. Economic history teaches serious lessons.

  76. theotherguydidit

    The boomer’s were screaming: “get your government hands off my social security” in the 1960’s. They were protesting the Viet Nam War. Which was funded using the Social Security revenue. They just didn’t know it was more then ending the draft.
    We exchanged our labor, talent, education, skills and productivity for wages and benefits. We paid taxes on our income and invested in the stock market, real estate market and bond market for our future. Despite the recessions, market collapses, double digit interest rates, political scams, and out right theft by the likes of Enron and Goldman.
    We reinvent ourselves to keep food on the table and a roof over our family’s head. When we sign a contract, we expect you will honor your end.
    We have been down this road one too many times in this life time.
    It is not the wages or benefits of the many that caused this. Yet, we are again expected to cover the losses of the TBTF.
    Sorry, that dog won’t hunt.

  77. “When we sign a contract, we expect you will honor your end.”

    I am sympathetic, but the younger cohort was not a signatory to that contract. The boomer generation signed the contract with itself:

    “We pledge that our children will pay off the debts that we are now incurring and rebuild the infrastructure that we allowed to rot and maintain the housing we have created and keep paying us inflation-indexed benefits even as working wages drop.”

    But as you can see, the age cohorts do not see eye to eye. Thus, gridlock. We will have debt-financed consumption until the capital markets refuse to fund it.

  78. I am an old man that seems to have ruined our economy. Do you have money in a savings account? I do. They pay .99% interest which is down from the 1.3% they were paying. Why is it so low? So they can make greater profits of course. And in the larger picture to force us into the stock market where we really be robbed. By the way, I am collecting social security to the tune of $20,000 a year. My town property tax is $8,000 a year. I paid into S.S for about 40 years and have been retired for ten. Bring on the death squads!

  79. They eat catfood and die…

  80. Actually, what we must do is tax the corporations on a percentage of capitalization to discourage continued consolidation/monopoly. Also tax high incomes at progressive rates established during and after WWII. Also require federal incorporation of public corporations, cap executive compensation, stock options and giveaways. Also eliminate financial statement slight of hand and mandate transparency. Finally, tax financial transactions, especially derivatives, on basis of notional value. Of course, none of this will happen, since corporate fascism is firmly entrenched. But this is not to say the problem cannot be solved, merely that it will not be solved while a cretinous electorate continues returning captured clowns to seats in Congress. Both parties are equally complicit. Time to vote with one’s feet.

  81. Many seem to have forgotten that the majority of public retirement systems were well funded until the Wall Street robbery. When adding up the amount stolen by Wall Street firms just from retirement systems and plans, the amount stolen from the public is mind blowing, direct bailout money is just the tip of the iceberg.

    But, let’s blame those greedy workers for expecting payment of deferred wages. Workers invest their labor, the rich invest their money. Wages deserve protection before capital, not after!

    Please tell me again how deferred compensation, in the form of a defined benefit pension promise, is not worker saving but deferred compensation in the form of a defined contribution (401k) is.

  82. scathew,

    Did your father raise you and pay for your education?

  83. Question to all the above repliers:

    The debt US is in…the money never left Earth…..so where is it?