GEITHNER PLAN FOR BAD ASSETS

For the full plan text click on 'comment' at the end of this blog. The popular criticism of this deal assumes that these assets will not recover value in the medium term and that they are so toxic that the defaults on the underlying assets will merely cost the government and FDIC (aka taxpayers) while banks and hedge funds (who will buy the bonds with TARP subsidy and FDIC insurance guarantee) will both make money. Geithner believes that the interest on the loans to the bank asset buyers plus a shared risk/return will in time prove profitable or negligible loss for government? This is part of a masterplan.Prof. James Galbraith, Univ. Texas, author of 'The Predator State' and Prof. Paul Krugman both are highly critical of the Geithner Plan. Krugman's view is that it is a complete mess based on a misunderstanding of how important 'confidence' is and that this is merely a repeat of the response to the S&L crisis. One context for this is the stress-tests dictated by FDIC for the top 19 banks. Krugman finds the stress factors to be too mild (see 3 charts on US economy below). The forecasts may be politically adjudged or simply the usual consensus type that smoothe everything and are unable to foresee short term shocks. Galbraith says that from Obama to Geithner to Bernanke, policymakers are like doctors dealing with a "mildly ill" patient vs. treating one who is "gravely" ill. The economist fears the economy is in terminal condition requiring much more intervention than already prescribed. Certainly, when for the first time in memory world GDP in aggregate is in recession and there are no external pull factors, only internal push, then fiscal stance and other measures have to be that much stronger. Krugman accuses Geithner of believing that if only the problem of toxic collateralized debt assets and their writedown effects can be cured, then the economy will pull through. Another way of putting this would be the idea that Geithner thinks if the CDOs are quarantined the following charts could be replayed backwards? Galbraith believes government "doctors" are engaged in a lot of "happy talk" about recovery based on a "fundamentally flawed model," hinged on the idea the economy is self-healing and only needs a booster shot before it "naturally" returns to trend growth and unemployment in the 5% range (the natural rate of unemployment concept that he rightly despises). He says success for the Geithner Plan is highly unlikely as it is framed so far, with limited direct scope for helping millions of Americans grapple with a crushing level of household debt. To help replace consumer spending, massive additional government action is necessary, he says, as discussed in the accompanying video link (URL at end of this blog) and in a recent Washington Monthly article.
I disagree that the assets are so toxic as the economists broadly suppose. The loan pools are amortising fast in the period when other measures are mitigating foreclosures and will in the medium term naturally improve in quality with much of the edge taken off by credit enhancements and foreclosure mitigation measures. Therefore, the defaults will not rise as high as otherwise. If the assets are representative of RMBS then 25% is sub-prime and default rates are heading for half of that. But the assets are already discounted 12-20% at the highest rated end, and first loss tranches may be witheld and kept on banks' books for work-out, assuming that is the nature of the $3-400bn of ABS and other impaired bank-credit derivatives left on the books on the top six US banks. My numbers are: Therefore the Geithner Plan may work in a contributory fashion, maybe, by helping the banks maintain a higher regulatory and economic capital reserve. My view is that these reserves need to be up around the $1 trillion level to cushion the next waves of credit risk losses that will eat into all of this. Geithner's economic modeling I believe, along with Krugman, is based on factor values of the mid-1990s to the 2001 recession. The world context is however more severe more aligned cyclically thanks to financial and trade globalisation than in previous recessions. The world's trade patterns are wholly disrupted and we have no certainty about the new shape to global trade and payments. In moving from a period of a decade or more when the US deficit was the counterpart to most of the rest of the world's trade supluses, now the rest of the world has to resort to domestic growth policies and had politically and otherwise almost forgotten how to do that! Geithner is buying time until end of September when the next federal budget is formed and the stress-tests are part of this. The banks will have their capital reserves next re-set in September. meantime he may hope that the credit default spreads that price the banks' CDOs will continue at a more realistic level. And then one consequence of that could be an easing of the interbank funding market. In my view, the Fed and US Treasury should simply de facto nationalize the interbank funding market for financing the banks' funding gaps. But there is immense political objection to more £trillions being facilitated. the general public do not understand what is on and off the taxpayers' federal budget balance sheet. The bailout measures are almost all off-budget and there is a balancing of assets and liabilities achieved to do this. It is not therefore taxpayers' money except in the broadest democratic political sense. To be effective the fiscal deficit needs the support of bank lending levels being kept up. The fear is that banks would have to deleverage by 30% or more if their capital reserves get wiped before debt recoveries start to flow back onto the banks' books. A remaining problem for the banks is financing their funding gaps. The US banks have had low issuance last year and this too so far compared to Europe. And that seems a major problem right now as I do not see the $1 trillion of assets to be sold off (beginning with $500bn only) to approved buyers as sufficient to solve that. There is little evidence of what the banks are acheiving in filling the $5 trillion or so refinancing they require for their funding gaps. Covered bonds and MT Note programs by banks are either down or out of sight. There is a fear that deleveraging will hit industry and corporate bond defaults will balloon. But, the publiv mood when the $trillion numbers get aired is very hostile and fearfully so. The government, banks and hedge funds all look like carpetbaggers to an angry mob. Underlying all this is the risk of prolonged recession (already 15 months old). Currently, it looks as if the majority of businesses are just about earning enough profit to make their debt interest payments. New corporate bonds are high coupon (junk bond rates) even for top retailers and manufacturers. Therefore, not a sign of restructuring of corporate debt to take advantage of historically low central bank rates. (For an exhaustive rip through the carpetbagger culture develeoping in the US see bankingeconomics.blogspot.com. 'The Great Game'). I prefer more repo swaps (after 25-30% haircuts) of the assets at the Fed liquidity window along the lines of the Bank of England's SLS and APS. In the US, if the assets all come off the top six banks' books who hold over 80% of banks' impaired securitised structured-credit assets then $1 trillion is a substantial cleaning out that should restore the banks' ability to hold or grow lending in the recession. This is not all totally toxic. In my alternative defaulting mortgagees motivated by negative equity to quit their homes should be banded together to gain direct benefit from the discounting of their mortgage debts and remortgaged to reflect that fall in the value of their mortgages. This is better than hedge funds being subsidised to gain the 17%-25% returns they are seeking from buying these bank assets. Hedge funds are evidencing some distress with number being bandied about that their funds are down from over $2tn to $1.4tn or $1tn only and how 20% of hedge funds are folding. But there are thousands of hedge funds and a mass of them are always folding, especially among the 1-5 man little hedge fund LLCs. And, sure, some big ones are in trouble, but there is no talk of these 'shadow-banks', including big private equity funds, are posing a systemic risk, unless maybe to some 'money market funds' but these are mostly bank-owned and robust. At the same time I also agree with Galbraith's alternative recommendations, which he says will cost $1-$1.2 trillion above plans already enacted, include: - Higher Social Security benefits: This will aid seniors hurt by the downturn in home prices, financial assets and the dollar's purchasing power. - More government hiring: Infrastructure spending can help, but major building projects can take years to gear up (a point also made by Prof Larry Summers, Geithner's colleague and ex-boss), and they can, for the most part, provide jobs only for those who have the requisite skills. Galbraith wrote, "So the federal government should sponsor projects that employ people to do what they do best, including art, letters, drama, dance, music, scientific research, teaching, conservation, and the nonprofit sector, including community organizing - why not?" I totally agree with this for a whole raft of reasons. Galbraith proposes a payroll tax holiday: "This is a particularly potent suggestion, because it is large and immediate," and puts income in the pockets of working families, he says. For me a key to recession-busting as it also is for development aid to poor developing countries, how to productively put money into the pockets of the poor, including poor pensioners especially, who all have the virtue that they spend what they get. Also, from Galbraith, Fix Housing: Put a moratorium on foreclosures and have the government buy homes from those homeowners who have no hope of making their mortgage payments, as detailed in a forthcoming segment. We may assume that the mortgage debts are thereby wiped out. This is implicit in the USA where the only collateral for the mortgage is the value of the home. In other countries any remaining debt remains an obligation on the mortgagee, and in Japan that can be multi-generational! Helping Main Street is already on the US policy agenda in the form of Fannie Mae and Freddy Mac re-negotiating mortgage contracts to restructure the interest and repayment burden to not more than 30% of mortgagee incomes. I would go for a halfway solution too, that of passing the debt discount right back into the original mortgage agreement thereby cutting back much of the negative equity problem. There is a logic, however, to the public housing solution in that the sub-prime crisis had its origins in the cutbacks by governments of spending on social housing to zero for nigh on two decades! Galbraith's view is that any or all of these programs "can be scaled back" as growth resumes, but that the government cannot afford to hold back any ammunition in its fight against the deflationary forces of the credit crisis. This echoes a similar view expressed by Martin Wolfe in the FT that I also very much agree with.
Some big banks that have received financial help are buying the 'toxic' assets. Citigroup and Bank of America, other banks and hedge funds, have been aggressively scooping up the discount-price securities in the secondary market. The banks' purchase of AAA-rated mortgage-backed securities, including some that use alt-A and option ARM as collateral, is raising eyebrows. Alt-A and option ARM loans have widely been seen as the next mortgage type to see increases in defaults. Yet both banks have been aggressive in their buying, sometimes paying higher prices than competing bidders are willing to pay. Recently, securities rated AAA have changed hands for roughly 30 cents on the dollar, and most of the buyers have been hedge funds acting opportunistically on a bet that prices will rise over time. However, sources said Citi and BofA have trumped those bids. Geithner's Plan (PPIP) offers banks an arbitrage opportunity to neutralize the writedowns that the problem may require. A bank that will sell $10bn MBS to the PPIP that are on the books for 70c/1$and will sell for 50c/$1, requires writing down the 20s difference. The government has however tasked the banks to buy such assets and thereby try to bring more liquidity to the secondary market. The buying can also have been on behalf of customers. But it is also much cheaper to buy these assets than to create new assets, for the purpose of keeping up the bank's ;evel of loans to satisfy government requirement of not deleveraging in the recession. If the banks can buy artificially (turbulent market distressed prices) marked-down MBS for 30c/$1 and keep it on the books, as the PPIP makes a market for MBS off the bottom, the 30c cost basis MBS, if bought before the program starts, will now be marked up to the market price of 50c/$1, counterbalancing the bank's write down of the assests when
bought. The banks may also be helping to push up the market prices thereby revaluing all their holdings.
FDIC head, Sheila Bair, said she is open to banks taking equity stakes in those the public-private partnership funds as partial payment that will buy up illiquid loans from banks. The banks would be allowed to pay for their stakes with the very loans they are selling into the partnerships!
Citigroup, say, has CMB and RMB securities that have become toxic because Citi says they are worth 87c/$1 but the market thinks they are worth 30c/$1. Now, Bair, offers loans to buyers to pay much higher amounts for the assets because most of the purchase price will be subsidised by cheap government loans and exit clause contract. The bank then sells the assets to a special vehicle (SIV,SPE,or SPV) set up to pay for the assets. It gets an ownership stake in that vehicle in exchange for the assets. So the bank will trade the assets for ownership in a special purpose vehicle that owns those assets. Why would the bank want equity in a fund that is buying assets it is trying to get off their balance sheet - because the scheme involves a huge subsidy, allowing buyers to make double-digit returns even if half the assets they buy are worth nothing, or nothing until the property collateral is foreclosed on. Essentially, the PPIP deals allow banks to move their risk off-balance sheet, but with much of the risk also taken by government, which in itself builds in a price gain. Geithner et al is convinced that off-balance entities are the key to restoring the banks. The same has been happening in the UK with SLS and APS.

And for Tim Geithner's own views in the WSJ see: http://online.wsj.com/article/SB123776536222709061.html
Also See: http://finance.yahoo.com/tech-ticker/article/yftt_216311/Part-I-Geithner's-Plan-%22 and: http://finance.yahoo.com/tech-ticker/article/216690/%22Happy-Talk%22-Won't-Solve-Crisis-Galbraith-Says-Much-More-Govt.-Action-Needed;_ylt=AtCWuOtcOPiFarNfSB_.sHpk7ot4?Extremely-Dangerous%22-Economist-Galbraith-Says
and also
http://krugman.blogs.nytimes.com/2009/03/21/despair-over-financial-policy/
see also: http://topics.nytimes.com/top/opinion/editorialsandoped/oped/columnists/paulkrugman/index.html
Roubini echoes Krugman. He is the ultimate doomster. His economics consultancy estimates a total of $3.6tn of loan and securities losses in the U.S., including writedowns on $10.84tn securities and losses on $12.37tn unsecuritized loans ( emphasis on the word 'on' since these numbers are total outstanding). Roubini's view is that bank nationalizations are inevitable. I don't think he sees the technical problems of nationalizing without a change in the law first - the FDIC's legalistic view of the problem.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aZXiD0hnsSD8&refer=home

BANK STRESS-TESTING OF THE QUESTION: LET BIG BANKS FAIL? -US LEGISLATORS WANT TO GET MAD NOT EVEN

THERE IS A MAD POLITICAL BATTLE GOING ON OVER THE FIRST OBAMA BUDGET. Figuring out the impact of the Federal government budget (and then the general government budget too) is central to economic models and forecasting. The external account (trade and payments) weighs heavy too, and Keynesian models, as also implicit in National income Accounting standards, have long linked the two. With the credit crunch we are all at sea in determining how world trade and payments patterns will now change, and change dramatically they will (Japan has recorded its first trade deficits in living memory and China's trade surplus is down by 90%). But, while the current year ahead Government budget should be pretty much straightforward it is not at all. The Obama biudget is variously described as $3.6 or $3.9trillion spending. But, predicting revenue and actual deficit outcome is harder, especially when property taxes and other property income and corporate taxes and unemployment etc. are all currently volatile. The political centrists tend to show that revenue will remain flat and the deficit will relentlessly widen and this is all the fault of the Bush tax cuts. The decoupling of revenue and spending is not credible. The right of centre however go further. They are anxious to show that there is a take-off here that will go up like a rocket and create a deficit that alone will absorb over one third of National Income and cause all kinds of problems from bankrupting the country to undermining the credibility of the currency. Bush is credited with adding over $3.3tn to the national debt over two terms, the right-of-centre Heritage Foundation claims Obama over two terms would add $8.5tn to the national debt. The Republicans accept from surveys that 62% of voters oppose increased government spending, and by implication oppose deficit spending. They also argue that the Obama budget is not proper deficit spending and enjoin advisors to the administration in this e.g. Council of Economic Advisors Chairwoman, Christina Romer, wrote, “Countercyclical fiscal policy is not achieving its intended purpose” and economic advisor Jason Furman saying, “In the past, infrastructure projects that were initiated as the economy started to weaken did not involve substantial amounts of spending until after the economy had recovered”. And even Prof. Larry Summers who wrote, “Poorly provided fiscal stimulus can have worse side effects than the disease that is to be cured.… Fiscal stimulus, to be maximally effective, must be clearly and credibly temporary—with no significant adverse impact on the deficit for more than a year or so after implementation. Otherwise it risks being counter-productive by raising the spectre of enlarged future deficits pushing up longer-term interest rates and undermining confidence and longer-term growth prospects.” These are more code-speak signalling to show respect for recent past economic-policy orthodoxy, not empirical assessments, just the usual necessary conservative acknowledgement. In any case a general problem of consensus views is that the consensus of what economists predict has never been usefully accurate. There are reasons for this, but no excuses except one, which is that official data tends to be neither optimistic nor pessimistic enough and only picks up sudden highs and lows after 6 months when revising the data backwards. The counterpart to not seeing holes in the road is to project massive holes in the long run. There is a persistent fashion (first established by the Congressional Budget Office, CBO, in the mid-90s) to make unsustainable 50 year projections. Even in 2003, after a massive set of tax cuts, and in the midst of the Bush iraq war years, the centre right felt scandalized by Federal spending projections doubling as a ratio to GDP of nearly 40% by 2050. Such projections are just political tokenism and unrealistic. They also tend to talk of 'shares of' GDP, not 'ratios to' GDP, as if all of government spending is entirely a share of National Income i.e. based entirely on taking tax from taxpayers and any borrowing is ultimately a net cost to taxpayers (loading debt onto future taxpayers etc.) The Economic Stimulus Act of 2008 provided about $170bn in tax rebates to stimulate the economy. The CBO estimated this "would increase budget deficits (or reduce future surpluses) by $152bn in 2008 and by a net amount of $124bn over the 2008-2018 period." The American Recovery and Reinvestment Act of 2009 (passed by Congress on 13 Feb.'09) of c.$800bn of spending rises and tax cuts is estimated by the CBO of increasing the federal budget deficit by $185bn to end September (end of fiscal year '09), $399bn in '10, $134bn in '11 ($787bn over all of 2009-2019). Clearly, this is not a major fiscal impact in the short term. And, obviously, the $trillions of bailout financial interventions by government are not part of this budget. The Obama budget inherits a deficit spending, or fiscal gap, and adds to that. But budget authorisations do not reflect actual cash-flow impacts in the economy. Some fiscal impacts will be feeding theough from past years and current authorisation will not have material impacts until future years. Long-term data suggests that the 2008/09 recession is part of a long trough since the last recession in 2000. Serious professional economists agree with this and would say that the asset bubbles and rising debt level have followed from inability to recover to earlier growth paths because the Bush administration responded wrongly via tax-cuts, the so-called 'Jobless Recovery'. Political critiques aimed at the layman voters rarely consider circular multiplier effects or that money taken from some taxpayers is paid to other taxpayers (many of whom are the same people) or that a quarter of all federal revenue is obtained by taxing its own spending; they seek to politicise the budget at its face value. This is not realistic, just good politics. The US conservatives want a repeat of Bush tax cuts, not Keynesian increased spending. The same critique is transposed onto the financial bailout, deeming it Keynesian, 'throwing money at the problem' and some are calling for a Financial Services Commission to spend a year studying the problem and determining if regulation is a big part of the problem. Looking back we can see a series of problems over the past 10 years. But, it is also clear that looking at credit-market cycle-conditions gives us strong economic-cycle indcators. The US Federal Budget is not comparable to European Government budgets (which include more of general government budgeting). The government consumption aggregate of all rich countries is 19% ratio to GDP out of at least 30% general government budget ratio to GDP. In the US, the federal budget has a total ratio of 28% to GDP compared to European equivalents of 35-40%. US general government spending is also over 30% ratio to GDP. The full fiscal stance can only be gleaned by the general government budget level. Because of the size of the state and county tiers, there is a large differentiated distribution like the differention across European states. All this causes considerable problems for even the largest banks in forecasting the economic demand context and its impact on their balance sheets, as they are now required urgently to do. This is a new experience. It has been a long time since the last time a lot of banks failed in the S&L crisis. There have also been relatively short interuptions in the pattern of banks balance sheet changes in recent decades until now. The S&L crisis caused some investment and retail banks to be taken over while hundreds of savings & loans banks failed. The effect then was contained within the USA. This is not possible now, hence why we have a policy of securing banks and of working out the asset losses, but also the means for swapping these assets off-balance-sheet so as not to cripple lending growth (as is said to have occurred for a decade in Japan). The asset writedowns of the US as shown below are also echoed almost the same proportionately to GDP in Europe. BANKS AND ECONOMIC STRESS-TESTING
Prior to finding evidence, and continuing on regardless of any such evidence, that big banks are doing well in their underlying internal capital generation (net cashflow profits from traditional banking and investment banking - see my bankingeconomics.blogspot.com), some Senate and Congressional Legislators, and a constituency of millions (not least millions of bloggers) are calling for letting some big banks fail i.e. not less, but more, of what happened to Lehman Brothers! Are they totally mad or just totally mad-angry?
Two powerful Republicans on Monday called on President Obama to "let some big banks fail instead of propping them up with public money". Richard Shelby, the top Republican on the Senate banking committee, warned that the US would end up following the same path as Japan, which suffered a lost decade of economic growth by tackling its banking crisis too slowly, unless some big institutions were allowed to fail. "Close them down, get them out of business. If they're dead, they ought to be buried," Mr Shelby told ABC News. "We bury the small banks. We've got to bury some big ones and send a strong message to the market." Asked whether he was referring to Citigroup, Mr Shelby responded: "Well, whatever. Citi's always been a problem child." John McCain, senator from Arizona, who lost the presidential race to Barack Obama, said the administration had evaded the "hard decision . . . to let these banks fail". These comments coincide with a debate in the US whether Government should nationalise insolvent banks or allow the so-called "zombie" institutions to fail. The term 'zombie' has caught the popular mood. Hard to say though who are the real zombies in this debate? Some politicians repeat themselves, sticking to the same ideological line, like clockwork 'speak your weight' machines, regardless of what's going on in the economy at any one time. I guess like stopped clocks they will be right two times every 24 times. The real problem is how to anticipate and compensate for or stop how banks cyclically respond to recession. We can see in the above graph how banks recoil in recessions by cutting loans relative to deposits by roughly 10%. Given the scale of lending in the economy having grown relative to GDP, a 10% loan reduction (partly write-offs, mainly zero new loans) would translate into 15% in ratio to GDP! That would profoundly deepen further what is already a deep eonomic trough! Deposits here include deposits by banks as well as by customers. We can see a rising trend to maximise retail assets (loans) ratio to the total of all deposits, using borrowed funds to finance corporate lending, and strive to make assets in wholesale markets more by self-financing i.e. offsettings within the markets, hence also the growth of derivatives. But, the unravelling of derivatives markets today may do less to free up bank capital than to add to accounting losses. The Democrats, the Obama Administrationa andn the large banks, and I would hope many others, maybe the 38% of the population who do support higher spending, all would want to avoid the same scale of deleraging of all debt as occurred after the 1929 crash, but has largely been avoided in subsequent recessions. Yet, it seems such deleveraging is what many voices on the centre-right are in fact calling for? Who to help, or not, among the banks, is depending on the Obama administration's 'stress tests' of 19 leading financial institutions. The banks and the government itself must be able to address questions such as those I've indicated above. Similar tests are being variously recommended for Europe's top 45 international banks.
The stress-tests are to be so structured to answer an apparently simple question: can the banks balance sheets survive the economics of the next 1-2 years ahead without becoming technically insolvent, in a period of debt deflation. The first problem is that short-range forecasting is not easy, however necessary. Some trends may appear stable, but it takes only small wobbles to make significant differences in profit and loss. Banks have to look at the big picture of the economy, the economic cycle, at the monetary conditions, the credit cycle, and how these impact banks nationally and markets globall, and then at the bank's own position within these contexts and the how balance sheet performance is thereby pushed and pulled and then also management driven. Many factors cannot be easily trend-line predicted, but some can, and it is credit market conditions alongside confidence factor indicators that give the surest cycle and recession predictions. Macroeconomists tend to look for insupportable balances, but it is innovation within banking fin ance that has many times broken those contraints. There is a lot in banking that is either only known for sure over longer periods thn a few quarters or which are specially and uniquely manufactured and managed at the time, not forecastable. The exercise requires designing, building, data-populating, testing, and running of several complex models that the bank do not corrently possess. The timescale to get this right is less than 6 months. One problem already stated above is that economists when viewed for consensus (taking averages of many forecast models, which weights the result toward conventional older models) never 'forecast' recessions until well after they have begun. The question is therefore can a consensus view do any better in forecasting recoveries? The Republican conservatives don't want the administration to rush in for fear of a Japanese 1990s result. But the Japan case shows the danger of waiting and holding back. Following the bursting property and construction bubbles at the end of the '1980s all Japanese banks became technically insolvent. The result was years of zero or negative corporate borrowing.
The US administration team wants to avoid that mistake and to move forward rapidly and not spend a year in analysis. It wants the banks and US Treasury to produce comprehensive assessments in 6 months. Europe is trying to get its banks capital forecasts even quicker, within weeks.
The US Treasury team to oversee the stress-tests with FDIC has some staffing up problems too. The White House this week announced the President's nominations for 3 top Treasury jobs to fill key positions among 17 that have been vacant under Tim Geithner - Mr Krueger, Ms Wallace and Mr Cohen who have been serving as counsellors to Mr Geithner at Treasury. But, their appointments to full office-postholders are not certain. Cohen announced today he is withdrawing. Alan Krueger, a Princeton University professor and former labour department chief economist, is proposed as assistant secretary for economic policy - a crucial position under Tim Geithner. Kim Wallace, a former congressional aide and ex-Lehman Brothers staffer, is picked for Assistant Secretary for Legislative Affairs, key to working with Congress on the financial and economic crises. But getting appointments confirmed is hard. Last week, Annette Nazareth, short-listed for deputy secretary of Treasury, a former senior staffer and commissioner with the SEC, withdrew after several interviews and vetting of her financial history. So too did Caroline Atkinson, a senior official at the IMF, who was expected to be head the Treasury's international division. Others have not been named yet because the administration is taking longer to vet candidates. Any already working as advisors (counsellors) are constrained in what they can do until formally approved as assistant secretaries (the third-rung in the administration) by the Senate. David Cohen, an ex-Clinton Treasury official and a law firm partner, was proposed for the job of tackling terrorist financing and then became the contender for the International post after Annette Nazareth withdrew. Reggie Cohen dropped his bid after an issue arose in the final stages of vetting. Not one of Geithner's 17 deputies has been confirmed. Without senior leadership, lower-level Treasury employees can't make decisions or represent the government in crucial conversations with banks and others. Obama has been blocked several times by the Senate (most spectacularly when Tom Daschle withdrew after minor tax evasion was spotted) from appointing key officials across his government, including at Treasury. Critics say this hampers the tackling of urgent issues. The second administration rung is in place, but not the third rung, and so senior heads are working round the clock. The Senate will grill candidates about their attitudes to the question of prudential care about tax-payers money. The tax-dollar is one of the biggest voter issues at any time in US political history. What legislators and the general public don't get is that tax-dollars and the federal budget have relatively little to do with how Treasury finances the banking sector bailouts. Government is stepping into the confidence void in banking and redirecting large assets and money flows through it, with everything part of a double-entry book-keeping i.e. whatever is paid out is backed by safely discounted assets that are interest and fee-income generating. Hank Paulson possibly made his biggest mistake with TARP by going to Congress for approval. He thereby convinced the legislators that this is their business to be political about. Legislators see only two kinds of money - tax-dollars (discretionery and non-discretionery taxing and spending) and soft-dollars (political-money, campaign contributions, lobby-money). There is a third kind, which is government activities in money-markets. Paulson let Congress think it should be involved in oversight and approval of whatever the federal government and treasury are doing with money market finance that is the main source of bank bailout funding. That maybe was a big mistake? It could be dangerous, or at least compelling drama, and something new if the government's off-budget balance sheet financial operations become as politicised as the federal budget's tax-dollars.

FEDERAL BUDGET NOT PASSING

Following on from blog 3 down (26th Feb) more on the US Federal Budget that has been voted down in The Senate.
Yesterday, Republicans Party leaders wrote to the Speaker of the House and the Majority Leader asking for the upcoming omnibus spending bill to be posted online so everyone can read it. They wrote, "[T]he [Democratic] Majority has asked the American taxpayers to fund nearly $1.5 trillion in new government spending [roughly $14,000 per family] in just four short weeks. And yet now the Majority plans to spend hundreds of billions more without yet sharing the content of the bill with Republican Members or the public. In the midst of a severe recession, taxpayers have a right to see each provision of this legislation and evaluate the merit of each dollar of government spending their children and grandchildren are being required to fund."
Through the second half of 2008, the Bush Administration was pushing the bailout bill, TARP - worth (merely as a convenient measure) $3,000 per household in spending. The Federal budget year ends in September. So while TARP was voted down before being voted through, Congress passed a bill to authorise the regular spending of the Federal government into early March 2009, worth about $8,000 per household for 5 months. Congress didn’t finish the regular fiscal year 2009 spending process, and so kicked that can down the road until after the Presidential election by authorising funding until March 6th, until after both handover of the White House and time for the new administration to fully populate all office desks.
Then the priority became the Economic Stimulus Bill (fiscal stimulus or deficit-spending- that-we-hope- will-be-a-stimulus) worth $4,300 per household. Note deficit spending is Federal government spending minus revenue = net new Treasury bonds.
Funding for the regular operations of most of the government flashed "fuel tank empty" last week just as a bill to finish out the fiscal year was heading to final passage. But there were upwards of 9,000 'earmarks' (special interest projects, otherwise known as 'pork barrel') in that bill, and that didn’t sit right with a lot of people, especially given that in the Presidential debates both candidates were adament they would scrutinise each and every earmark and probably cancel most of them. So Senate conservatives took up the anti-earmark crusade and prevented passage of the omnibus spending bill on Friday 6th. So, instead, Congress passed another short-term spending bill. H.J. Res. 38 or £100 per household to fund the federal government until Wednesday, the 11th. By then, Congress must figure out what to do with the earmarks to get H.R. 1105 bill passed in the Senate to fund the government through to September 30th at about $4,090 per U.S. household.
The bill that’s in only very few offices on Capitol Hill totals about $500 billion, or $5,100 per household to cover 7 months and less than one third of the total annual Government budget. One solution might be to strip the earflaps out and put them all in a sperate bill for line by line debate. That should keep Congress busy for a few months?