It took a little while, but it is clear what the entire ‘Stress Test’ theatrical is about. It has nothing to do with the banks or with the credit markets or Global Reserve Currency or anything prosaic.
ZeroHedge and Mish’s Global Economic Trend Analysis are cynical but they aren’t cynical enough, They aren’t seeing the big picture. They’ve never lived in Washington, DC, they simply don’t understand how Machiavellian the bureaucrats are.
In DC, Wall Streeters are empty- headed hillbillies and yokels. These are not masters of any universe, they are contemptible loiterers at the Treasury Department loading dock looking for handouts. They are no different from all the other well- dressed beggars who lurk around the other ‘Loading Docks of Power’.
The government has cleverly set the last of the bailouts without actually announcing the end of bailouts. I should’ve known. Commencing the bailouts was very dramatic with all that Saturday- Sunday maneuvering and handwringing in front of Congress. The end of bail would have to be as melodramatic as the beginning of bail, no?
I originally assumed the Treasury would simply stand aside and hold their collective nose, like they did with Lehman Brothers. Like a sister agency such as USDA or Commerce or Labor Department, Treasury would finish the bail project and some dude would write a 300 page report and the temporary office space would be repainted and that would be that. Officials wouldn’t answer the phone (or e-mails) and some Mega business – auto maker- retail chain- defense contractor would go belly up and that would be the end of them. A fatcat would wail and stockholders and lenders would wail and thousands would be laid off (fired) and the bankruptcy judge would liquidate.
And liquidate and liquidate and liquidate.
I thought Fannie and Freddie’s rescue would be the last, if only on account of the enormous exposure carried by those entities. The potential loan losses were so huge and the effort so pointless … and I was so wrong! The GSE’s were just the beginning of what appeared to be a tradition! Lehman was let go as a part in the theater. it was done to instruct the rubes how horrible and big bank failure would be … how … hopelessly interconnected everything is. As a consequence Congress approved TARP and another trillion- dollar stimulus on Obama’s account.
The Federal Reserve additionally lent trillions more in custody swaps and guarantees.
I actually think the Bernanke/Geithner/Summers cabal has been underestimated. The government has not only escaped the ‘Moral Hazard’ trap but it has done so without making any public statement which would serve to activate the moral hazard trap! The stress test puts all the onus of further failure on the banks and the financial services industry. This test was made to order for the 19 largest lenders. It indicates none of them are insolvent and none need more than a few measly billion in capital. How perfect for the Treasury. They can go back to being tightwads because the banks themselves – say they don’t need any more money!
Not only have the Fed and the Treasury out- maneuvered the finance industry and the rest of its critics, they have also -via Goldman- Sachs – ginned up and nice equities rally so the banks (and REITS) can recapitalize easily by issuing and selling new stock. The Fed’s Quantitative Easing has given crap bon … excuse me, Junk Bonds new life. Treasury is managing the sale (dismemberment) of GM and Chrysler; it’s even sticking up for the (disgruntled) working man!
Times and circumstance will never be better. Carpe Diem banks!
With signs of a turnaround everywhere, – indicators are not pointing straight down – with no new acute crisis on the doorstep, the government can step back from the brink of nationalizing the entire economy and get about serious business like reforming the college football playoffs.
In reality, the government cannot bail any more. Congress will not authorize any more funds, no matter how many Democrats are dragooned into the Senate and House from from mental hospitals and flop houses. The public is not just irked, it’s livid. The tests merely validate reality. The amounts authorized should have never been committed in the first place. At least it can be said that the last three months of maneuvering and manipulation have taken the taxpayer off the hook. If banks fail now, it is not the fault of our government. This gives a point or some end result to the stress tests, which have no other conceivable purpose.
The Washington bottom line is never about progress, hope, policy, or leadership. It’s all about who gets blamed when the entire sick mess blows up. Trillions spent to get The People off the backs of Wall Street!
Unfortunately, the foregoing suggests a level of sophistication that the Obama regime so far has not exhibited in any other area of governance. They have been content to continue Bush policies, albeit with cleaner, more articulate PR. It is possible tht the stress test is nothing overly clever, just Treasury time wasting and more business as usual. Time will tell; a large bailout on the heels of the inevitable banking/credit breakdown will indicate another disappointing episode of Obama- esque nincompoopery.
Krugman assails the Stress Tests!
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.
A lot of people on the progressive side besides Krugman have complained about the failure of our system, and I have to disagree. Our problems are not failures but successes. American finance enabled a short- term system that functioned as well as could be expected at the task of maximising transformation of inputs into money. We ran out of inputs … people with good incomes, cheap energy and credit.
We are now seeing the oil price/scarcity issue manifest itself again. Over $55 a barrel means an economic slowdown is on its way. Not that the green shoots mean anything. GM needs another $6 billion.
Oil will not go to $140 a barrel. People are a lot less rich in 2009 than they were in 2008. They need to learn to loiter around the loading docks of power.