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Economy: Federal Watchdog Can't Vouch For Administration Job Numbers
• "The government watchdog overseeing the federal stimulus program testified Thursday that he could not vouch for the Obama administration's recent claims that the money had saved or created 640,000 jobs. He suggested that the administration should have treated the number with more skepticism," the New York Times reports. "Earl E. Devaney, the chairman of the Recovery Accountability and Transparency Board, said... up to 10 percent of the recipients had not filed the required reports showing how many jobs they had created or saved."
• "As he readies an overhaul of the nation's financial regulatory system, House Financial Services Chairman Barney Frank," D-Mass., "is already looking at avenues to revise the package before it goes to the floor the week of Dec. 7," CongressDailyAM (subscription) reports. "At the top of the list is revisiting language his panel approved Thursday that would give sweeping powers to the GAO to audit the Federal Reserve."
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.