Economy: Unemployment Bill Passes Senate
• "A $20 billion-plus package of homebuyer and business tax breaks was advanced in the Senate Monday, together with a precedent-setting expansion of unemployment benefits to help carry the jobless through the holiday season," Politico reports. "Ending weeks of delay, all but two Republicans joined Democrats on an 85-2 roll call to cut off debate. Procedural obstacles remain, but passage this week appears all but certain."
• "Sheila Bair has been a consistent critic of the Obama administration's financial regulatory plans, and she is now urging lawmakers to limit the Treasury Department's influence in a key part of the overhaul," The Hill reports. "Bair, chairwoman of the Federal Deposit Insurance Corporation (FDIC), is concerned about a new federal council of regulators that would oversee risks across the financial system. Legislation backed by the administration and House Financial Services Committee Chairman Barney Frank (D-Mass.) would create a new council of regulators, with the Treasury Department at the head."
• "A top White House advisory committee Monday recommended ways to expand jobs in exports, energy-efficient buildings and infrastructure, but in an apparent nod to the U.S.'s growing debt, stopped short of suggesting such policies be promoted by large federal spending," the Wall Street Journal (subscription) reports.
• "Newly empowered by the Supreme Court, the attorneys general of several states hit hard by the housing collapse are exploring consumer fraud suits against major mortgage lenders," the New York Times reports. "Frustrated by the banks' inability or unwillingness to stop an avalanche of foreclosures, the states are considering lawsuits over the creation and marketing of millions of bad loans as well as the dismal pace of mortgage modifications."
Treasury has notified the banks that it believes need more capital, but it has delayed releasing that information to the public and hasn't even fully disclosed its stress test criteria. The stress test approach depends to some extent on public disclosure moving banks to absorb losses and recapitalize, but there is the countervailing risk that full disclosure will foment a panic. Is there a way out of this quandary that makes good practical and economic sense?
-- John Maggs, NationalJournal.com
Responded on April 29, 2009 3:29 PM
Nicolas Véron, Research Fellow, Bruegel
There is no easy and elegant solution to this quandary. Expect a bit of volatility. If no large bank is found insolvent (or to use the same euphemism as the Treasury, in need of additional capital), the markets will not believe the tests are credible, and the reaction may be very difficult to manage. If on the contrary the results are really bad – say, more than half of the 19 tested banks are found insolvent – then it’s the Treasury’s responsibility to prepare the marketplace. The recent signals being on the positive side (“most US banks have sufficient capital”, etc.), this would require a difficult U-turn, but the longer Geithner waits, the more difficult it becomes, and the more chaotic the reaction may be. If, as seems most likely at the time of writing, only a few banks are insolvent, then the least bad option – as was implemented in Sweden in 1992, admittedly with a much smaller and simpler banking system – is to let the banks themselves announce the news, good or bad. They have the investor r...
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There is no easy and elegant solution to this quandary. Expect a bit of volatility.
If no large bank is found insolvent (or to use the same euphemism as the Treasury, in need of additional capital), the markets will not believe the tests are credible, and the reaction may be very difficult to manage.
If on the contrary the results are really bad – say, more than half of the 19 tested banks are found insolvent – then it’s the Treasury’s responsibility to prepare the marketplace. The recent signals being on the positive side (“most US banks have sufficient capital”, etc.), this would require a difficult U-turn, but the longer Geithner waits, the more difficult it becomes, and the more chaotic the reaction may be.
If, as seems most likely at the time of writing, only a few banks are insolvent, then the least bad option – as was implemented in Sweden in 1992, admittedly with a much smaller and simpler banking system – is to let the banks themselves announce the news, good or bad. They have the investor relations skills and know how to manage expectations. There is precious little time left to do so. In this scenario, Geithner should exert pressure on the banks so that when he announces stress test results next week, the marketplace already knows most of what’s in there. Those banks which are found insolvent will be massacred by the stock markets, of course, but there is no way they can avoid this outcome. This has already been illustrated on Tuesday 28 April, when City and BofA expressed disagreement with the Treasury only to see their stock prices take a plunge.
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Responded on April 27, 2009 10:01 AM
Grover Norquist, President, Americans For Tax Reform
When you are in a hole: stop digging.
Former Senator George Aiken of Vermont had a suggestion concerning the slightly less expensive project known as the Vietnam War: declare victory and quit.
It would have been wiser and less expensive to let failing banks fail and solvent banks get on with life $700 billion ago.
But better late than never.
All this flailing around by the Obama administration is making things worse, delaying a recovery.
Updated at 10:22 a.m. on April 27.