Time for a Weekend

We don’t try to be a news site – it’s too much work to keep up with everything that happens on an hour-to-hour basis – and generally we try to provide analysis and commentary instead. But right now I just want to note the major turn events have taken in the last few days.

After a few weeks of relative calm – the economy was doing badly, but we knew that already, and there were no major controversies or scandals since the auto bailout and Bernie Madoff – the pace has picked up again. To summarize, in case you were on vacation this week:

  • Bank of America started falling into the abyss, but got a lifeline, just like Citigroup 2.
  • Speaking of which, Citigroup announced that its strategy for the last ten years has been a failure and that it is splitting itself into two banks, a “good bank” and a “bad bank” – but unfortunately it still owns both of them. It also announced $6.0 billion in increased loan loss reserves, $7.8 billion in writedowns on securities, and a $5.3 billion writedown on derivatives (I wonder how much of that affects the $300 billion in assets guaranteed by the government), but nevertheless made an Orwellian assertion of “Continued Capital and Structural Liquidity Strength.”
  • The Bank of America bailout undoubtedly made Congressmen even more mad about TARP, but at the same time all these shaky banks (and personal lobbying by Barack Obama) convinced the Senate to release the second $350 billion (both houses would have had to block it). The vote was 52-42, with 46 Democrats and 6 Republicans voting in favor. From one perspective this is not surprising: the Democrats are supposedly the party of activist government, and it was mainly Democrats who passed the bill in the first place. But seen from a long-term perspective . . . the Democrats are the party in favor of saving big banks? and the Republicans are willing to let them fail? How things have changed.
  • In a story that hasn’t gotten the attention it deserves (no doubt due to general bailout fatigue), Treasury is lending $5 billion in TARP money to Chrysler Financial. Now, is Chrysler Financial a healthy financial institution that just needs a little more capital to resume lending, or is it a systemically significant financial institution whose failure must be prevented? Right, I don’t know the answer either. But I guess after the GMAC bailout it was a foregone conclusion. Chrysler, of course, announced that it was relaxing credit standards and offering zero-percent financing on pickup trucks and minivans. (Full disclosure: I own a minivan.)
  • The CPI declined 0.7% in December (excluding food and energy, unchanged), meaning that in Q4 the CPI fell by about 3.4% (excluding food and energy, it fell 0.1%)., further stoking deflation fears. But again, most of the fall in prices is just the reversal of the run-up in energy prices in 2007-08. Now that oil prices seem to have flattened out (gasoline and heating oil are up slightly), we should be able to see what is going on. I am still in the camp that the Fed will be able to prevent deflation. It’s basically a question of how hard they want to try, and they are afraid if they try to hard they will overshoot and create too much inflation.
  • And Ben Bernanke gave a speech in which he floated the idea of creating a government-sponsored “bad bank” that would buy troubled assets from troubled banks: “Yet another approach would be to set up and capitalize so-called bad banks, which would purchase assets from financial institutions in exchange for cash and equity in the bad bank.” This idea got further support from Henry Paulson and Sheila Bair, and could be the big story of the next week (except for something else happening in Washington on Tuesday). Isn’t this original TARP all over again? Yes, it’s similar, but there are good ways and bad ways to do it. The biggest problem I had with original TARP was that it necessarily involved overpaying for assets; Simon and Peter have outlined one way of avoiding that problem.

Overall, this pace of news, primarily from the financial sector, has not been a good sign over the past several months. It’s usually a sign that things are going to get worse, although there is always some chance that this time we will solve these problems once and for all. And there is a new crew moving into town on Tuesday.

4 responses to “Time for a Weekend

  1. The pace is picking up elsewhere, too. In the UK, Barclays Bank shares dropped 25 per cent yesterday and The Telegraph newspaper reported this:

    “In an attempt to restore confidence within the financial sector, the Treasury will tell the banks of its plan on Saturday. It aims to announce details of the rescue package publicly early next week.

    “The bad bank plan has climbed the political agenda in the past couple of weeks as the Government has become aware of the extent of the lenders’ bad debts.

    “Sources said that a bad bank would have to take on about £200 billion of toxic assets. That would take the Government’s total commitment to solving the banking crisis to almost £1 trillion in taxpayers’ money that has either been spent or pledged.

    “That equates to about £33,000 per taxpayer. The total sum is equivalent to more than two-thirds of Britain’s annual GDP of £1.4 trillion.”

  2. The blog content is informative and thankfully lacking in grandiosity
    and invective. Am I furious about the ’emperor has no clothes’
    meltdown in the financial structure? Probably more scared than
    mad….for now. Who does one blame? Human delusion and
    On a practical level, regulation is
    a creampuff, a pushover. On a practical level the efficient
    market thesis is… well, crap. Let’s pile on Bush, why not.
    But this mess is way bigger than him and his outsized
    shortcomings. Neither Summers nor Rubin wanted derivatives
    regulation that might have prevented or limited the latest
    spate of bad news….Uncle Sam backing up 81 bn of
    derivatives of unknown worth(lessness) in a package of
    111 bn for our friends at BoA/Citigroup II. Wow! It’s like
    a cartoon! But for real. Just follow the money.

  3. Mark A. Sadowski

    I take it Mr. Kwak that you calculated your figures end to end. I came up with very different numbers for price changes. I have a decrease in CPI by 2.4% between the third quarter and the fourth. On a core CPI basis I have no change up to a 10th of a percent.It might be helpful to some of us if you told us your methods.

  4. To tell you the truth, I just added up the numbers for Oct.-Dec. in the first table of the BLS press release. That’s why I said “about” 3.4%, because I know that adding up cumulative percent changes is not quite accurate.

    But looking at Table 4 in this BLS document, I see that the seasonally adjusted CPI was 218.813 for September and 211.490 for December. Dividing one into the other I get a total decrease of 3.3%, which is pretty close to 3.4$.