Capital Commerce

This analysis of the banking situation from David Goldman is about the best I have read:

The trouble from the beginning has been that the Geithner plan had the wrong idea about banking and economic growth. You don’t need to shuffle toxic assets around to get the banks to lend. The Fed can take care of the mortgage market, and has done so impressively. Mortgage rates have collapsed thanks to Fed purchases of MBS and first-time buyers are buying foreclosed properties, keeping the recovery rate in most markets at around 50% (and that keeps the toxic assets paying with limited impairment).

But you do need the banks to earn enough to compensate for the loan write-offs that inevitably must pile up during a deep economic downturn. That is why cannabalism is the cheapest and easiest solution. Of course Citi and JPM should be net buyers rather than net sellers of toxic assets. ... messy, and downright cannabalistic, but it’s by far the cheapest way out of the mess.

Me: Warren Buffett has said pretty much the same thing. Maybe Geithner will replaced bank executives with a more compliant lot.

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In the WaPo, Simon Johnson and James Kwak make just that case:

In a normal advanced economy, creating hundreds of billions of dollars in new money would not foster runaway inflation. As long as the economy is underperforming -- for example, with high unemployment -- stimulating the economy will only cause that "slack" to be taken up, the theory goes. Only when unemployment is low again can workers demand higher wages, forcing companies to raise prices.

But is the United States really a normal advanced economy anymore? We seem to have taken on some features of so-called emerging markets, including a bloated (and contracting) financial sector, overly indebted consumers, and firms that are trying hard to save cash by investing less. In emerging markets there is no meaningful idea of "slack;" there can be high inflation even when the economy is contracting or when growth is considerably lower than in the recent past.

If the United States is indeed behaving more like an emerging market, inflation is far easier to manufacture. People quickly become dubious of the value of money and shift into goods and foreign currencies more readily. Large budget deficits also directly raise inflation expectations. This would help Bernanke avoid deflation, but there is a great danger that unstable inflation expectations will become self-fulfilling. We do not want to become more like Argentina in 2001-2002 or Russia in 1998, when currencies collapsed and inflation soared.

Me:  Easy to manufacture, tough to eliminate -- especially without causing a double-dip recession.

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Obama's cap-and-trade plan may become for Democrats what Social Security reform is for Republicans: a handy policy cudgel for the other side even if it never happens. Even though cap-and-trade is supposed to be a more politically viable method for dealing with carbon emissions than a straight carbon tax (because it's more opaque), it took the GOP about a picosecond to start calling cap-and-trade an "energy tax." And Team Obama seems aware of this problem since it lowballed revenue projections for the plan. Here is how Ed Garlich of  the Washington Research Group at Concept Capital sees things:

It is now likely that the Obama administration’s campaign pledge to reduce greenhouse gas emissions by 14% below 2005 levels by 2020 won’t take legislative form until later this year.  Without significant compromise on a number of aspects the debate could well linger into 2010, an election year, when the political will to resolve controversial issues may fade. The White House was already on alert as bi-partisan opposition to a carbon tax was beginning to build among coal and oil producing state congressional delegations. ... Notwithstanding a proposed $65 billion in tax rebates to low-and middle-income-households, there is enormous uncertainty with respect to the impact an $80-$200 billion per-year energy consumption tax might have on an already fragile economic recovery. Coupled with the effect on the domestic economy is concern that without comparable international policies, U.S. goods would be at a considerable price disadvantage on the global market. Presidential advisors have talked about the possible need for a carbon tariff on imports.

Me: So , in the end, a carbon tax may end up the better route for Democrats, especially if they fully offset it with a cut in payroll taxes or some such. But, of course, Dems want to use those $200 billion in revenues for both energy investment and, perhaps, to fund healthcare reform.

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Market-to-market, the accounting rule that ate Wall Street, has finally been relaxed. The changes from FASB, applicable to first quarter earnings, allow companies to use “significant” judgment when valuing assets. That will reduce writedowns on certain investments, including mortgage-backed securities. All in all, it could boost banks’ net income by at least 20 percent. Maybe  or more. But let me give you another number: $30 trillion. Those are global stock market losses as a result of the financial crisis, and that includes the recent rebound which, I believe, can be greatly attributed to signs the rule would be loosened. Not pushing this change earlier is what Team Obama should be apologizing for at the G20 summit, if anything.

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