All Blog Posts from Econwatch

This post by Jill Schlesinger originally appeared on CBS' MoneyWatch.com.

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Special Inspector General for TARP (aka "SIG TARP") Neil Barofsky said something we've all known for a while: the government gave away the farm when AIG failed.

If you recall, AIG's failure meant that the companies on the other side of all of its contracts (counterparties) were going to be left holding the bag. Under normal cases of bankruptcy, the court would impose haircuts to the amount of money due to counterparties, but because AIG didn't actually declare bankruptcy, the counterparties claimed that they were owed 100 cents of every dollar. The only bank that even considered taking a haircut was UBS - the Swiss, for goodness sakes - hard to imagine that a Swiss bank could make US banks look bad, but here's a case in point.

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Senate Banking Committee Chair Chris Dodd is planning to push a financial reform plan that would restructure the government's control of the banking industry, according to today's Wall Street Journal.

Dodd, the Democratic senator from Connecticut, has been praised by President Obama for his financial reform efforts, particularly for his work to establish a consumer protection agency.

His new plan, however, would significantly diverge from efforts by the Obama administration and the House Financial Services committee to overhaul the nation's financial regulation system.

The bill Dodd is proposing would almost completely restructure the federal financial regulation system, taking almost all bank-supervising responsibilities away from the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC), the Journal reports. Bank-supervisory responsibilities would fall to a new agency that would oversee all national financial institutions: one single financial regulator. Currently, America has four federal regulatory agencies.

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This post by Jill Schlesinger originally appeared on CBS' MoneyWatch.com.

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We knew that the Fed wouldn't change interest rate policy, but as my favorite teacher Mr. Maloney used to say, "words matter!" The Fed surely gets mired in word-smithing, but as the economy comes to a critical juncture, can't the central bankers speak in plain English?

Just tell us something like this: "the outlook has improved, but we're concerned that the fragile player still needs an injection of steroids to play in the big game." Sorry if you don't like baseball metaphors, but we're in the midst of the Fall Classic, so why not?

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This post by Jill Schlesinger originally appeared on CBS' MoneyWatch.com.

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While the world continues to be distracted by the sideshow over executive compensation, there was finally a bit of good news from Washington yesterday. The House Financial Services Committee (in conjunction with the Treasury Department) finally released details of financial regulatory reform. Under the proposal, the Fed would become the primary systemic risk overseer, with input from a council of regulators. I like to think of this as the nation's superheroes - admittedly, a somewhat aspirational vision.

The proposed legislation gives the FDIC resolution authority - that is, the power to resolve financial holding companies that fail. Instead of the taxpayers being on the hook for the bill, the burden of bailouts would be on the financial industry itself. Firms with more than $10 billion of assets would pay for the rescue or unwinding of a collapsed competitor.

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This post by Jill Schlesinger originally appeared on CBS' MoneyWatch.com.

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With the same fervor that causes pundits to prematurely declare the death of the dollar, so too are worries about future inflation bubbling up. You hear people saying, "of course inflation is coming, just look at the soaring price of gold as an indication!" Sorry to disappoint, but but as a former gold trader, I can tell you that it's been a long time since gold prices traded as an inflation hedge. Rather gold has traded alternatively as a fear asset or a risk asset.


When investors think the financial world is coming to an end, they sometimes turn to gold. This is in line with my dearly departed step-grandmother, who said that it was the gold that her mother sewed in the lining of her cloth coat that allowed her to escape the Nazis when they marched into her Hungarian village. Alternatively, when you see stocks, bonds and gold all rising concurrently as the dollar is dropping, that's a pretty good indication that ol' fashioned greed is back on the scene, courtesy of the world's central banks.

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This post by Jill Schlesinger originally appeared on CBS' MoneyWatch.com.

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Why is everyone surprised to learn that Treasury Secretary Timothy Geithner's speed dial is filled with Wall Street CEOs? Even before the financial crisis, when he was running the New York Fed, Geithner was delighted to act as the nerdy wanna-be for the exclusive power club, garnering invitations to corporate dining rooms from his former mentors.


In fact, Geithner was chosen as Treasury Secretary precisely because he was wired into the big banks. There's a reason that Wall Street cheered his nomination to the post. For all of its talk about change, the Obama Administration is filled with recycled Clintonistas, like Geithner and Lawrence Summers, who were at the forefront of deregulation.

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This post by Jill Schlesinger originally appeared on CBS' MoneyWatch.com.

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Yesterday, Bloomberg reported that Wells Fargo plans to raise interest rates on all credit card customers by 3% on November 30th. Funny coincidence- House Financial Services Committee Chairman Barney Frank wants to speed up the enactment of the Credit Card Act from February 22, 2010 to December 1.

Sometimes I wonder just how low the credit card companies can sink, but then I remember that some of the card company practices are akin to legalized drug dealing. Once they got you hooked, it sure is hard to get off the stuff. For more on this analogy, check out my appearance on CNET's 404 podcast with my pals Jeff, Wilson and Justin.

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U.S. banks "are slow" to absorb losses on commercial real-estate loans, according to a Federal Reserve analyst. That's stoking fears that banks will face a crisis similar to the one fueled by the collapse of the residential housing market.

According to a Wall Street Journal report ($) Wednesday, a Fed real-estate expert told banking regulators last month that "banks will be slow to recognize the severity of the loss - just as they were in residential."

Commercial property values are down along with rental payments, pummeling lenders. But instead of taking hits on bad loans immediately, many banks are "extending loans when they come due even if they wouldn't make those loans now," the Journal states.

"There's been an extend-and-pretend philosophy by banks to forestall hits to their balance sheets that might occur," Patrick Phillips, new chief executive of the Urban Land Institute, told the Journal.

A Journal analysis also finds that banks heavily exposed to commercial real estate are keeping less cash on hand to cover bad loans – setting aside just 38 cents in reserves for every $1 in loans during the second quarter. That's down from $1.58 in extra capital for every dollar in bad loans at the beginning of 2007.

According to the Fed presentation, commercial real-estate losses are expected to hit 45 percent next year.

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When the interest rate decision is announced today, the Federal Open Market Committee will most likely leave its current monetary policy unchanged and say that "economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period."


In other words, just because Chairman Bernanke said that the recession is "technically over," that doesn't mean that consumers are feeling too swell or that Fed policy will shift. Fed governors have told us as much in their public statements and appearances. Just because we have backed away from the edge of disaster doesn't mean that a sustained recovery is baked in the cake.

Here's what I think is on Bernanke's mind right now:

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This post by James Picerno originally appeared on CBS MoneyWatch.com.

In February, President Obama signed the massive $787 billion stimulus bill into law with the idea of jump-starting the economy with spending on everything from tax cuts to new highways to programs to increase energy efficiency. The size and specifics of the package-and even whether it was necessary at all-were hotly debated, and the resulting bill was supported by only three Republicans in the Senate. Seven months later, what can be said about whether the stimulus package has worked or not?


The answer is that at least some of the spending has goosed the economy. But it's a tricky business to assign credit-if a start-up hires six people, was it the entrepreneur's vision or the government grant that was responsible? And the jury's still out on all the stimulus money that hasn't even been spent yet.

In many ways, the Cash for Clunkers program, which offered rebates of up to $4,500 to consumers for upgrading to new, more fuel-efficient cars, exemplifies the debate over the effectiveness of stimulus spending. The program disbursed $2.9 billion in rebates, spurring the purchase of close to 700,000 new cars and giving a much-needed boost to the faltering auto industry. Critics accurately point out that many of those purchases would have been made anyway in the future, without taxpayer subsidies. But one of the primary goals of stimulus spending is to get people spending money now, while the economy is hurting, and Cash for Clunkers certainly did that. (See our earlier story, "Did Cash for Clunkers Really Work?")

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