James Pethokoukis

Politics and policy from inside Washington

More stress tests for the banks?

Jun 9, 2009 14:40 UTC

The TARP oversight panel, led by medical bankruptcy alarmist Elizabeth Warren, thinks it’s about time to redo the strest tests. Just talked to banking guru Bert Ely about this. He had a number of objections including a) allowing the repayment of$68 billion TARP money probably means the government is already factoring in worsening economic conditions , b) it raises the possibility of reigniting investors anxiety, and c) it continues the politicization of the bank via government control. To what end? To keep the banks under the thumb of Uncle Sam and influence lending. If you control credit allocation, you control the economy.

Has Obamanomics already failed?

Jun 9, 2009 13:43 UTC

That is is the insta-conclusion of Newt Gingrich. What you can say, I think, is that the administration appears to have been overly optimistic. Indeed, Obama advisers are already admitting that. The economic forecasts driving the stimulus package were too rosy, as was the “stress test” worst case scenario. And had Team Obama been gloomier — as gloomy as the Inauguration Day speech, say — would their policies have been different, would they have followed the advice of folks like Paul Krugman and Robert Kuttner and pushed for a much bigger stimulus package? Or would they have at least front loaded the existing stimulus package by increasing the emphasis on tax cuts vs. “investment” spending? Perhaps. But the gamble they took was to let the Fed pretty much handle the near term (and avoid a depression) while they would focus on bolstering the economy for the longer term and pushing through their policy agenda.


“A recession is when your neighbor loses his job; a depression is when you lose yours. And recovery is when Obama loses his.” – Ronald Reagan
Only in the original 1980 quote it was “when Jimmy Carter loses his”

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Roubini: 9 reasons why the recover will be a bust

Jun 9, 2009 10:23 UTC

Nouriel Roubini tries to grind his heel into the green shoots:

First, employment is still falling sharply in the US and other economies. Indeed, in advanced economies, the unemployment rate will be above 10% by 2010. This will be bad news for consumption and the size of bank losses.

Second, this is a crisis of solvency, not just liquidity, but true deleveraging has not really started, because private losses and debts of households, financial institutions, and even corporations are not being reduced, but rather socialized and put on government balance sheets. Lack of deleveraging will limit the ability of banks to lend, households to spend, and firms to invest.

Third, in countries running current-account deficits, consumers need to cut spending and save much more for many years. Shopped out, savings-less, and debt-burdened consumers have been hit by a wealth shock (falling home prices and stock markets), rising debt-service ratios, and falling incomes and employment.

Fourth, the financial system – despite the policy backstop – is severely damaged. Most of the shadow banking system has disappeared, and traditional commercial banks are saddled with trillions of dollars in expected losses on loans and securities while still being seriously undercapitalized. So the credit crunch will not ease quickly.

Fifth, weak profitability, owing to high debts and default risk, low economic – and thus revenue – growth, and persistent deflationary pressure on companies’ margins, will continue to constrain firms’ willingness to produce, hire workers, and invest.

Sixth, rising government debt ratios will eventually lead to increases in real interest rates that may crowd out private spending and even lead to sovereign refinancing risk.

Seventh, monetization of fiscal deficits is not inflationary in the short run, whereas slack product and labor markets imply massive deflationary forces. But if central banks don’t find a clear exit strategy from policies that double or triple the monetary base, eventually either goods-price inflation or another dangerous asset and credit bubble (or both) will ensue. Some recent rises in the prices of equities, commodities, and other risky assets is clearly liquidity-driven.

Eighth, some emerging-market economies with weaker economic fundamentals may not be able to avoid a severe financial crisis, despite massive IMF support.

Finally, the reduction of global imbalances implies that the current-account deficits of profligate economies (the US and other Anglo-Saxon countries) will narrow the current-account surpluses of over-saving countries (China and other emerging markets, Germany, and Japan). But if domestic demand does not grow fast enough in surplus countries, the resulting lack of global demand relative to supply – or, equivalently, the excess of global savings relative to investment spending – will lead to a weaker recovery in global growth, with most economies growing far more slowly than their potential.


Now c’mon.. you almost excerpted his whole post. What’s your opinion?

SF Fed: Near 11 percent unemployment and a jobless recovery

Jun 9, 2009 00:28 UTC

The San Francisco Fed paints a gloomy outlook for the U.S. labor market with unemployment hitting near 11 percent next year and above 9 percent through 2011(bold is mine):

We combine data on involuntary part-time workers with the standard unemployment rate to arrive at an alternative measure of labor underutilization. We plot this measure in Figure 3, which shows that the labor market has considerably more slack than the official unemployment rate indicates. The figure extends this labor underutilization measure using the Blue Chip consensus forecast for the unemployment rate as a benchmark and then adding a share of involuntary part-time workers based on the proportion of workers in that category to the unemployed during the current recession. This projection indicates that the level of labor market slack would be higher by the end of 2009 than experienced at any other time in the post-World War II period, implying a longer and slower recovery path for the unemployment rate. This suggests that, more than in previous recessions, when the economy rebounds, employers will tap into their existing workforces rather than hire new workers. This could substantially slow the recovery of the outflow rate and put upward pressure on future unemployment rates.


Does this explain rising bond yields?

Jun 8, 2009 19:30 UTC

This chart from Jim Glassman of JPMorgan makes an argument about seasonality:


Xerox CEO: The good times are really over for good

Jun 8, 2009 19:11 UTC

Here is a bit from Meet the Press from May 31 (pointed out by David Henderson) where David Gregory interviews a gloomy  Anne Mulcahy, CEO of Xerox:

MR. GREGORY:  So when there is recovery, Anne, what is the new normal?  What does the new economy look like?  How is it different?

MS. MULCAHY:  Well, I think it’s slower growth.  I think that, you know, we’ll all be living in a world where perhaps the capacity that got created in the last decade is not coming back as quickly.

MR. GREGORY:  Meaning we talk about–is wealth going to return?

MS. MULCAHY:  I think wealth does return.

MR. GREGORY:  To the levels that we’ve experienced it?

MS. MULCAHY:  Not to the levels we’ve experienced it.

MR. GREGORY:  Right.

If economy improves, does GOP have a plan B?

Jun 8, 2009 18:09 UTC

Over at NRO, my pal Ramesh Ponnuru looks at all the green shoots and mustards seeds and wonders the following:

Are Republicans and conservatives overinvesting in pessimism about the recession? … If Republicans keep up this approach and the economy does begin to recover in a way that registers with voters by the 2010 elections, then Obama and the Democrats will … be able to say that their take on the economy was superior to that of the Republicans—and that claim will reinforce impressions that their stimulus was responsible for any improvement (whether or not it actually was). … I think Republicans would be better advised to say that there are some good signs, none of which seem connected to liberal policies, and that those policies threaten to increase inflation before too long. …  In 1993 too many Republicans resisted Clinton’s tax increases by claiming that they were not merely likely to reduce long-term growth below what it would otherwise have been but that they were incompatible with economic growth at all. When the economy recovered, they were discredited and the recovery was attributed to Clinton’s policies. Let’s not make the same mistake this time around.

Me:  My guess is that unemployment will still be pretty high a year from now and real estate hardly booming. As far as how the economy might affect the electorate, what I do know is that there is lag between economic performance and economic perceptions that is greater than many might assume. Let me point out one example, the 1994 midterm elections after the 1990-91 recession:

Even though the economy had then been growing for 14 straight quarters and the unemployment rate was down to 5.8 percent, 72 percent of Americans still thought the economy was “fair” or “poor” and 66 percent though the nation was headed in the wrong direction.  That’s right 3 1/2 years after the 1990-91 recession ended, the economy was still weighing negatively on voters and hurting the incumbent political party.

A salad of green shoots and mustard seeds

Jun 8, 2009 17:52 UTC
Brian Wesbury and Bob Stein of FIrst Trust Advisers offer some sunshine on the U.S. economy:
1) Since bottoming in February, consumer confidence has had the fastest three-month increase on record.
2) The ISM manufacturing index, which fell to historic lows over the winter, has climbed from its hole to signal that the overall economy is now expanding.
3) The Richmond Federal Reserve index, a measure of manufacturing in mid-Atlantic states, is showing growth.
4)  Container shipments both into and out of the ports of Los Angeles and Long Beach – key measures of international trade – have traced a V-shaped recovery.
5) In the financial markets, the yield on the 10-year Treasury note is back up to 3.86%, almost exactly where it was in August 2008, just before the crisis hit.
6) The VIX Index – a measure of stock market volatility and risk – has also traded back to levels not seen since August 2008.
7)  Meanwhile, key commodity prices, such as oil, copper, lumber, and gold are well off crisis-period lows.
Their bottom line:
In the last full calendar quarter before September (the second quarter of 2008), real GDP grew at almost a 3% annual rate. This is exactly what we expect for the third quarter of 2009 – 3% real GDP growth – with even faster economic growth in Q4 and then in 2010.

Banks out of the woods … or not

Jun 8, 2009 14:20 UTC

This is my choice hunk of the day from the brain of economic analyst Ed Yardeni:

(1) The most bullish development is the record spread between Treasury note and bond yields and the federal funds rate. Historically this has been a big booster of net interest income for the banks. Another major positive is the narrowing of credit quality spreads in the bond markets.
(2) The relaxation of the mark-to-market rule on April 2 should continue to provide for positive y/y comparisons for bank earnings.
(3) The banks have raised lots of additional capital in the bond and stock markets and are meeting the requirements to shore up their balance sheets following their recently completed stress tests.

Now here is the downside:

(4) The bad news is that rising mortgage rates are already depressing mortgage refinancing activity, which was a major source of earnings during Q1.
(5) The jump in the unemployment rate means that bad loans to individuals could mount during the second half of the year.
(6) Residential and commercial mortgages are also likely to generate more bad loans over the rest of the year.



I don’t think banks are out of the wood yet! With a slow economy the next waive of default will be coming from commercial mortgages.
We started seeing more defaults. I think Banks will suffer more loses this year.

We hope for the best.

Eddie Fadel

Rail not as green as you might think

Jun 8, 2009 13:53 UTC

Here is an interesting bit from New Scientist that the White House might want to consider before spending billions on high-speed rail:

Crisscrossing the US with a rail network, however, creates a different problem. More than half of the life-cycle emissions from rail come not from the engines’ exhausts, but infrastructure development, such as station building and track laying, and providing power to stations, lit parking lots and escalators.

Any government considering expanding its rail network should take into account the emissions it will generate in doing so, Chester says. Setting up a public transportation system that only a small proportion of the population uses could generate more emissions than it cuts, he adds – especially if trains and buses are not well connected.

“New rail systems should serve as links to other transit modes, as is often the case in Europe and Japan,” he says. “We should avoid building rail systems that are disconnected from major population areas and require car trips and parking to access.”


“Setting up a public transportation system that only a small proportion of the population uses..” A large portion will have to use it, just as in Europe, because we can’t keep up this gas-guzzling crap forever.

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