Elizabeth Warren on Charlie Rose

Elizabeth Warren appeared on Charlie Rose last night.



Warren has lately appeared in many places (here's a new link to an unedited Planet Money full interview, and even "Tech Ticker"), which is encouraging, as she is talking of the most important situation/issue facing the country: the increasingly impossible situation of the middle-class squeeze. Unlike many prominent commentators though, Warren has real insight into some of the causes (another couple of fundamental causes and also solutions are a significant part of the book I've been writing). Instead of only being a raised voice or trying to present an economic ideology though, Warren gives non-ideological insight, and actually pinpoints some of the real causes.

So what happens when a clear, non-ideological mind like hers faces the labyrinth of money and influence and interests that is the TARP and the current situation? It's a fascinating moment in American history.

She cut through the fog to say the heart of the problem is indeed what's happening in the American family. This is true in that there were forces that pushed families into the choices they made, which in combination with choices banks and nations made (for instance the Chinese monetary policy of holding down their currency value) helped create this situation and outcome which is now threatening a world-wide depression.

I think she's right we have to address the problems faced by American families (specifically the problems of families with kids), of which there are several pieces, in order to be able to solve the big economic problems. For instance, banks' continuing troubles flow from continuing loan defaults (on mortgages and credit cards and auto loans, etc.) But the start and base source of loan defaults is from the middle class squeeze, which preceded the recession, and even if the recession eases will still keep banks in trouble and at risk, crimping normal lending.

Warren has superior insights versus many popular opinions. For instance, contrary to the popular perception of families buying fancy houses they could not afford is the bigger, far more widespread reality of a larger number of families that brought very average houses which were expensive and which they could not afford because they were competitively bidding up house prices in locations with good schools, which appear key to a successful life for their kids. Instead of getting sidetracked by the appearance that many "average" houses in newer areas are bigger than houses used to be, Warren cuts through the fog and pinpoints what's really happening: competitive bidding to be inside good school districts, whether in newer neighborhoods, or old. Small, 1950s era houses in the East have been bid up right along with the newer houses in the South.

That's an insight. Warren's insight.

That's a clear pinpointing of the real situation.

Fixing the big economic situation finally comes down to several specific problems, some complex, some quite simple. The insight is to be able to figure what really matters and what is more a side issue. There are even some simple problems that really matter, in addition to some complex problems (complex for instance are such as fixing banks or the situation of education and competition for schools). So in addition to talking about complex problems, Warren also talks sometime of simple problems. Credit card deregulation in the 70s and 80s for instance leading to the current unsustainable, theft-like practices. Sometimes to fix an engine you need to fix several things, and you have to fix them individually, even the smaller issues. So even with a major fix like a timing belt, you might still have to fix a relatively simple problem like a bad spark plug wire.

Warren has found some of the trouble other mechanics did not, and that makes repairs easier.

The Best of the Week

As a regular feature I'll be posting on the weekend a Best of the Week, which will occasionally be updated on Sundays also (if not posted on Sunday to begin with). Work is proceeding on the final draft of the book I've been working on (see my profile).

This week a couple of pieces stood out for drama:

Charlie Rose had an interview with Neel Kashkari (notes below):



some interesting moments (times):

9-11 minutes: house prices, loan modifications, what will end the "housing crisis"
17-23 minutes: the $700 billion, the crisis, the changes, the reasoning
24: "Nationalize (sic) the banks" vs. reality

...

And not to be over-shadowed, Adam Davidson, whom is usually fun to listen to, ended up going overboard on Elizabeth Warren, finally resorting to labels and pigeonholes. Of course, such don't fit so well. If Elizabeth Warren is "left", then the left is smaller than I thought, and we'll be needing a new label (or not) for what used to be "left". If you listen, here are a few economists Adam forgot when he said no economists agree that the problem of household debt is a central, primary problem on par with fixing banks (and I'm including any public/blog/interview statement to the effect that consumer/household debt is central and a main source of the problems banks face):

Ken Rogoff
Timothy Geithner
Nouriel Roubini

There are more (for instance Krugman has suggested this a few times lately), but these three could suffice. (Still if readers want to suggest more or offer links, I'll include them).

Notice these three don't fit in a common pigeonhole, unless it's "realist".

Ok, here's the link for that interview.

We hope Adam will re-balance. Sometimes a person has to make a mistake in order to find their own next step.

Update: After Adam's apology Monday, Planet Money posted the full unedited interview on Tuesday, which really is a lot more interesting.

...

One broad point I'd like to make: No one really knows the economic future. We have profound insights such as from Irving Fisher, but even standing on the high platforms of insights such as these don't afford a clear view through the fog of all the ever-changing decisions and efforts that together will sum and multiply and modify each other into true complexity.

One insight I can offer: ultimately our economy is a joint decision of all of us. We can indeed decide to move up, down, or in a new direction, and the mass decision of tens of millions moving together in response to the bully pulpit is no small matter. It could be decisive.

Elizabeth Warren Offers a Clear, Comprehensive Review of the Situation with Banks

The author (co-author) of the great "The Two Income Trap", which explains one of the key facts and seeming contradictions of the modern American economy -- how a two-earner family can become less secure than a one-earner family through competitive bidding with other families to buy expensive homes in neighborhoods with good schools -- brings us more of her clear, insightful thinking below. This is a great overview of the entire banking situation and our options in a scant 8 minutes. Warren shows why she was chosen as a key public watchdog to report to Congress on this entire mess, and I recommend this video for anyone interested in this subject, from experts to those wanting to digest a well-explained summary in a few minutes. (Also see interesting excerpts from the full report and my comments after the video.)




The report is here.

Two highlights of many:

In addition to drawing on the $700 billion allocated to Treasury under the EESA, economic stabilization efforts have depended heavily on the use of the Federal Reserve Board’s balance sheet. This approach has permitted Treasury to leverage TARP funds well beyond the funds appropriated by Congress. Thus, while Treasury has spent or committed $590.4 billion of TARP funds, according to Panel estimates, the Federal Reserve Board has expanded its balance sheet by more than $1.5 trillion in loans and purchases of government-sponsored enterprise (GSE) securities. The total value of all direct spending, loans and guarantees provided to date in conjunction with the federal government’s financial stability efforts (including those of the Federal Deposit Insurance Corporation (FDIC) as well as Treasury and the Federal Reserve Board) now exceeds $4 trillion.

What this is saying: The Treasury Dept. is working in tandem with the Federal Reserve, and using the Federal Reserve's ability to create new money by just printing more of it and buying bonds and securities to effectively double down and triple down and quadruple down (well...etc., you get the idea) on their bet -- the uncertain gamble that bailing out various types of lending, from auto loans to credit cards, will work out for the best.

If it doesn't work out, if the loans go bad en masse, then the Federal Reserve could lose considerable capital. But that capital value is stored ultimately in the value of the dollar itself, what you and I rely on to conduct our economic lives. In other words, if the Fed loses, you and I are the actual ones that lose.

--------

The second highlight:

[One of several questions from the oversight panel to Sec. of the Treasury:]

2. The thrust of the TALF [the Fed's latest way to lend more money] appears to be to attract investors with large enough pools of capital, such as hedge funds, to the ABS [Asset-Backed Securities, or basically all sorts of lending packaged into a type of bond] market by allowing them to purchase ABS on a highly leveraged basis with risk of loss largely transferred to the taxpayer directly or, through the Federal Reserve System, indirectly, in a manner that confers substantial benefits on these private investors who have little at stake. Please explain in detail the rationale for such a transfer of risk to the taxpayer with so much of the benefit transferred to private investors and please provide the facts and figures that support this rationale.

[Geithner's response:]

"...Because the questions you have raised pertain primarily to the structure and operation of the FRBNY [Fed. Reserve Bank of NewYork] lending facility [TALF], FRBNY staff has taken the lead in responding...." [Note Treasury Sec. Geithner was the FRBNY president previous to his current post.]

The detailed response by the FRBNY below points out the risk capital (private investors' money) which those taking TALF loans put up (and if their gamble goes bad due to bad loans, they lose part or all of their risk capital; this is referred to as a "haircut" in the response), the risk-premium interest rate such TALF loans carry, and...this notable, perhaps hopeful, bullet point:

[excerpt from FRBNY response:]

"The current economic situation is extraordinary and the outlook is therefore especially uncertain. We accounted for that uncertainty by making very conservative assumptions when calibrating the haircuts. The haircuts are designed so that, even if the economy evolves in a manner significantly worse than we currently expect, all credit costs will be more than covered by the haircuts and the excess interest rate spread paid by investors, resulting in no credit losses for the Treasury or Federal Reserve."

hmmmm....

Let's hope so.

This is as well designed as can be, no doubt.

It's a gamble though.

A reasonable gamble. A double or triple-down.

In the end, it's reasonable to try to save the old system, to try to make it as easy as possible to get a car loan or a credit card for those that want to buy on credit. The only primary danger in the wide range of governmental efforts to prop up parts of the old status-quo I see is maintaining semi-dead corporations (including banks) that can't really flourish long-term without real restructuring, and thus crowding out better competition (such as better-managed banks) that might replace the subsidized corporations with something much better if they had the open space and opportunity.

But...too much household debt (vs. income) was and is the problem (see here, here, here and here.) We still need to reduce consumer (personal) debt, and the faster this finishes the better, and here's how to speed this up.

The Language of "Nationalization"

Not long ago, you and I knew what the word "nationalization" meant.

Perhaps, someday again, we will know.

In the last year, the word "nationalization" has been used as a lever against some bank rescue plans, although now an effort is being made to simply bypass the tricks of this changed meaning of "nationalization" by just using the word anyway even for sensible market-style (getting stock in return for money) plans.

While this new usage of the term as a label even for the good rescue plans may work out, let's step back and examine this loaded word.

This post isn't about whether this "nationalization" is the right course -- it is -- but instead I want to remember our normal meaning and look at what is happening to this important word.

--------------

In real use in everyday language, for decades now, until the last few months, nationalization had a clear meaning.

It meant the government seized a company or group of companies -- sometimes by outright theft -- from the previous owners.

There were only three possibilities of nationalization in regard to the value of the company (or industry) -- appropriation (theft), purchase, or taking on responsibility and ownership of failing companies that were insolvent or heading into insolvency.

Nationalization as theft we read of at times in backward countries in Latin America or Africa. Nationalization as purchase was unusual.

Nationalization as rescue of a failing company was European.

But what distinguished nationalization from other measures to handle a failing company was whether the government intended to keep and operate what it had seized.

After all, we did not refer to FDIC seizure as "nationalization" (perhaps this will change too; who knows).

A taking into intended permanent national ownership -- that was "nationalization".

It meant owning a company or industry and running it, as a national industry, for the benefit and national purposes of the government and the nation.

...

In contrast "investment" -- an all-American thing -- was buying a stake in a company, through stock or bonds or similar methods.

...

So...how did we arrive at a place where bailouts combined with investment (getting preferred stock in exchange for capital, like TARP 2008), becomes "nationalization" if we even temporarily end up with more than 50% of the stock, for instance?

Are bailouts with investment now to be called "nationalization" all the time?

Is "up" now "down", and "left" "right"?

This is quite a moment for ideologues, and every other American too.

The irony of it. The only plans for rescuing our banks that actually make good old market sense like getting something in return for our money (investing) are now "nationalization" -- while actually just giving taxpayer money away for free (in part or whole) is only an innocent "bailout".

But there is indeed a normal common usage for this alternative to "nationalization" -- a bailout where we simply give away taxpayer money for free to a favored group.

In America, we usually call most variations of this kind of transfer...

socialism.


And when the favored group is a wealthy elite, this is similar to the practice of "corrupt communism" in the Soviet Union for instance.

Another phrase for these non-"nationalization" bailouts is "crony capitalism."

But in favor of general public clarity, we'll need to stick with something more concrete and transparent for the alternative to "nationalization". I suggest:

Insolvent bank stockholder bailout.

Geithner's Competence Reassuring but...(Update)

We are in the midst of dealing with the one of the most far reaching situations our democracy has ever faced -- a swirling mix of moral hazard, the interests of the people, our economic outlook, and complex questions of how to pull some good out of the huge mess that is the end of the decades-long credit bubble.

Since it's already clear to most people that we have many banks likely to be revealed as insolvent, and perhaps all too many (some on that below), I'd like to focus on a few big picture aspects and thoughts of the moment.

While the general outline of the new plan for banks doesn't yet have the decisive details that will determine the eventual return of future taxpayer money sent to rescue banks, the outline itself is encouraging to me in a couple of ways. A suggestion of some good possibilities (or better rather than worse choices) appeared today. Here, I'm only going to give some impressions and initial thoughts.

By combining several fundamental ideas, the new plan seems likely to have effective elements -- its odds of at least partial success are raised by a combination of solutions.

But the most striking thing listening to Geithner’s testimony today was his general and specific competence.

Update: The open question though is whether Geithner will try to maintain vested interests at taxpayer expense (such as reverse-Robin-Hood welfare for shareholders of insolvent banks). As of 2/23, this remains to be seen.

The combination of ideas together with first-rate competence give me reason to hope for as good an outcome as might be managed. We'll see.

In the meanwhile, Calculated Risk has an interesting post with a general outline for the "stress test" (examination of bank solvency).

Yves Smith points out many or most of the likely and possible bad aspects of what we know to date. I'm sympathetic to her wariness. Recent history suggests when there is a possibility of transferring wealth unjustly through government, it often happens.

As to the estimates of how much U.S. banks are in the hole, it's notable that Kenneth Rogoff gives a number like $2T (says Yves). (here's a brief CNBC Rogoff bit -- "$2 or $3T")

One good question this raises is whether if we willingly put some large banks into FDIC or other restructuring-like processes after an examination ("stress test"), just how many large money center banks might we wish to insist on saving, once the worst case banks are removed? (Because we all know perfectly well we won't disappear all the large banks.)

Taxpayers are already on the hook for the losses because FDIC was created federally with federal backing. FDIC has something like $35-$40B in its reserve. Compare that to $2T.

I understand perfectly the righteous anger that would want most all of the bank officers that have achieved insolvency to go. I still hold we should prefer some (more than 1 but less than most) of the worst larger banks to be restructured or dissolved --which means FDIC or similar process -- new control, new bank officers or absorbed into other banks, etc. We then choose to recapitalize the better-managed large banks. And finally, encourage the best banks to expand. (and specifically to allocate capital to favor the best!) This is a pragmatic idea of trying to give more lending power to the best lenders. Speaking in general terms, I could imagine something like up to eventually 1/3 (or in a worst case 1/2) of the biggest existing banks getting processed and their officers losing control, and then some of the remaining banks diversely gaining portions of the pieces.

But to specify much presumes more information than any one person has (I think!). We don't yet know precisely how good things are at some of the presumably better banks, those with lower portions of nonperforming assets, once "stress tested".

Of course, we should like to see some relatively well-managed banks, of all sizes, and especially the best banks of medium to larger size, expanding a great deal within a year or two. That would demonstrate a good outcome.

---------------

Update: we have a nice bonus -- Krugman and Rogoff on the Newshour

Or video of complete segment with intro.

What to Do about Banks

In a way, one good bank solution is simply to continue existing strategies, with an emphasis on resolving which banks are solvent.

Consider -- if you have Washington Mutual branches in your city, you may have noticed they are still there and still in business. They just have different owners. We can trust our current process for handling insolvent banks -- it works well.

When TARP investments were initially injected into banks, the main objective was to stop the accelerating general bank run.

Enough time had passed before TARP that many of the worst actors -- CountryWide, Washington Mutual, IndyMac, Bear Stearns, Lehman -- had been removed or absorbed. The initial necessity to let market discipline take out the worst actors had been accomplished, and when Wachovia was taken out it began to look like enough had been done in terms of an object lesson and it was time to begin the recapitalization.

There is no fundamental reason why the whole previous plan isn't still a good approach, but there is a reality that some banks that looked ok, like Bank of America, were not so ok. In Bank of America's case, the late acquisitions of CountryWide and especially Merrill began to weigh down this previously strong bank, showing that it's never too late for mismanagement during a crisis.

At this point, we (literally all of us US taxpayers) are now on the hook for Bank of America's choices, which complicates what could otherwise be such a simple proposition:

Let them fail, and let FDIC, with taxpayer money, reimburse the depositors to the FDIC limit.

At this point though, we've already put big money into many remaining banks, so....

....it's time to consider what FDR did shortly after taking office in the midst of a continuing bank crisis more severe in some ways than we face now, but not so much more severe in other ways.

He weeded out the bad banks and created a convincing guarantee of the remaining "good" banks, ending the bank crisis in 1933. This was one of FDR's greatest successes.

We could do the same now.

We won't need a general bank holiday, as some work has already been done. The step here for us now is to investigate which banks are really too close to the edge, and put them into the arms of the FDIC a little sooner.

Essentially, we'd just make the FDIC uptake process more aggressive and put in the taxpayer dollars the FDIC will need as determined during the examination phase.

What are the presumptions about house prices (or commercial real estate, etc.)? Exactly that the bubble in the Case-Shiller price graph(s) will be erased fully, so that prices return to levels of the year 2002 (this accounts for inflation). We can then simply extrapolate defaults from current trends. This will yield a reasonable prediction of the near future cash flow value for mortgage backed securities and their derivatives. Similar principles can be applied to commercial real estate, and using trend extrapolation can even be applied to credit card lending, etc. Some banks will then be clearly insolvent, by more than a few percent of their nominal assets. These are rounded up and sent to the FDIC.

The political way to present this is we are fulfilling the FDIC promise we have made to each other as a nation. It's money we are paying ourselves.

And then, once more bad banks are removed, we can recapitalize the survivors in proportion to their assets at market value, thus proportionally favoring the stronger banks -- adding more lending power to those lenders that have shown better management. When a bank's assets are of high quality, it then proportionally receives *more* new capital, not less. We want to put loan decision making into the hands of better decision makers.

As to how to recapitalize, in addition to the proportional-to-asset-market-price principle, taxpayers must gain ownership stakes in exchange for their money, like any stockholders naturally have. Stock is a perfectly fine method.

The percentage of taxpayer ownership that results is less relevant than simply the fact that taxpayers aren't victims in a transfer of wealth. No. Something a little more just happens.

Taxpayers are the investors. They have voting rights, which could be administered by a congressionally-appointed board. Their shares can gradually be sold at a profit, 5 or 10 years from now.

Instead of a taxpayer rip off, we have a taxpayer investment.

The Tax Rebate & TARP Worked Better Than Advertised Against The "Greater Depression"

One of several memes we've heard over and over now to the point of becoming conventional wisdom is that "the tax rebates didn't work".

Now, before you think I'm simply on one side of a partisan debate, let me say first I think taking sides itself a mental error that leads to further errors. I'm not on any side, unless it turns out Obama keeps doing everything right as we go along. I think most of the large publicized pieces of spending in the stimulus proposal are good ideas, and good together as a large package (though not bringing enough timely stimulus in 2009, see why speed matters). My view is that A) we need many different kinds of stimulus, both government spending and tax cuts, but that B) the stimulus, however large, will not suddenly bring us into a roaring recovery, that C) the deep recession is likely to last for years in terms of feeling like we are in a recession. In certain ways, all of this is beside the point. There are fundamental reasons why America cannot have another golden age where it is always wealthier than other nations. And worse, it's even likely that the unemployment and economic challenges we face cannot be fixed completely through most kinds of government stimulus -- that the temporary setup where China grew rapidly while holding down American inflation and interest rates (by providing cheap goods and exporting their excess savings to us also) has played out to an end, bringing back more normal economic turbulence. Only special, unique conditions like those of the 1950s or 1990s can create economic ease, and only temporarily. (I'll post about this interesting question later.)

But today, it's popularly understood we are under threat of another Great Depression. Some even speculate we may face a Greater Depression, due to the profound debt overhang weighing on our economy.

This housing price bubble was more pronounced than any before, implying a deeper fall and heavier than normal fallout. Arrayed against this danger is a more knowledgeable and aggressive Federal Reserve and Federal Government than in the 1930s.

Most people now understand there is a feedback loop of job losses increasing fear -- which in turn leads to further pullbacks in consumer spending, creating more job losses.

So the public at large widely understands that this recession could deepen and keep deepening without intervention.

And while the two sides of the debate argue about what kind of stimulus will "work", the real picture is both more complex and more simple than commonly presented by major columnists, news reports and economists.

It's more simple in that ultimately all the financial crisis is one simple process -- the inevitable fallout of an enormous decades-long world-wide credit bubble. Another element in the popular view of what is happening -- "letting Lehman Brothers fail worsened the crisis" -- is also false. The whole picture of a "credit crisis" worsened by "letting Lehman fail" presumes we could always have grown debt, ever more and more -- more mortgage debt, higher debt to income ratios, more consumer spending and less saving, without limit. Thinking that allowing Lehman to fail caused more crisis implies that if Lehman was saved, the crisis might pass, and things could continue as before the crisis. In this view, a "crisis" or "shock" happened which should and could have been contained. So the story goes, or went, with the support of some prominent voices.

Nevertheless, there is more and more recognition spreading that we had a more genuine problem of a true out-of-control bubble -- that the housing bubble is part of a more fundamental story.

The implication of having a real bubble is that it will indeed eventually burst and collapse, and that falling house prices are not just caused by foreclosures or psychology alone -- are not merely a by-product of some other chance financial events.

Saving Lehman Brothers would have been like patching one significant hole in a slow motion bursting bubble -- it would not stop other from holes opening and growing in the ever thinner bubble surface.

So the story is more simple than often portrayed -- we ran up debts much faster than our average incomes grew, leading to an inevitable hitting-the-wall moment.

By late 2004, there were no actions by the Fed, by the Federal Government, by regulators, by anyone, that could have made any difference. House prices had already become out of reach of average families with conventional mortgages in too many places.

If it hadn't been New Century Financial hitting the wall first, it could have been American Home Mortgage Investment Corp. If it hadn't been Bear Stearns collapsing before Countrywide, it would have been Countrywide collapsing before Bear Stearns.

If Lehman had been saved, at you and your children's expense, instead of at the expense of various investors, that would not have saved Washington Mutual (as an independent bank), IndyMac, Wachovia, Merrill Lynch, etc.

One of the more disturbing political processes I've seen up close is the evolving political story of the TARP. At this point the story has evolved to say the initial phase of TARP under Hank Paulson failed and was opaque. But Paulson originally presented TARP as a way to stop the ongoing crisis of banks failing and our financial system appearing in danger of collapse. This was not something that could be easily talked about -- even if more Congressmen understood the real picture, it tends to increase panic for many leaders to talk of most well-known banks failing. Instead Paulson had to warn simply of a general financial crisis intensifying. TARP, then, was easy to re-define into the ultimate political football. When Paulson flailed about at first due to the impossible contradictions of his initial plan of buying bad mortgage securities, and then later finally followed the mainstream advice of most economists to inject funds directly into banks -- the plan that was actually used -- he gave a characteristically brief announcement, perhaps presuming it would be understood.

But while his announcement made sense to economists and well-read followers of the situation, how many average people understood the whys and hows of the new plan? While Paulson efficiently and effectively shored up the surviving banks -- and did so openly and in full view -- it seemed to me everyone would be pleased the best possible plan had been enacted. The best possible outcome to that moment had been found.

But Paulson's actions were subsequently portrayed as opaque ("lacking transparency") and against the will and intent of Congress!

I wonder if many of our elected representatives realize that many average people are not fooled at all by the political rhetoric. Many more people than they realize are quite aware this was the Big One, and more banks were heading to the chopping block. More people than they'd guess have paid attention to the fact the big bank failures stopped after TARP, at least those with names everyone knew, the kind that kept everyone on edge.

The initial TARP money stopped the accelerating large bank failures (Washington Mutual and Wachovia were the last for a while), and reduced the panic, just as it was proposed to do.

TARP was initially proposed to "stabilize the financial system." TARP indeed did so, to the extent possible with that amount of money. But "stabilize the financial system" is too vague a term it turns out, and has been re-defined quite easily to mean things other than what close observers understood.

Often we'll hear a bit on a newscast of someone who wonders why TARP didn't stop the financial difficulties entirely. Some even believed TARP was meant to also save homeowners near foreclosure. This was certainly a communications mess.

The initial TARP was successful in a sense that mattered. A panic that threatened to escalate to complete collapse of all large banks was averted, along with the psychological damage that would have added against already weakening confidence.

TARP so far has been similar to strapping parachutes onto the passengers (banks) falling out of the disintegrating airplane of banks-that-took-risky-bets.

Those with parachutes are still drifting downward of course, but for now they are still breathing. Some banks receiving funds weren't in that shaky airplane, but rather stood safely on the ground, with few risky bets, and are in far better shape.

Ideally those sounder banks could actually buy out the weaker, poorly-managed banks at low prices, resulting in the best possible outcome for the nation.

But some in Congress actually objected to the beneficial effect of well-managed banks using TARP funds for acquisitions!

Does it occur to many in Congress that their political rhetoric is part of why the level of trust for Congress is so low? Even when we don't know exactly what the political misdirections are, we intuitively sense we often aren't hearing the real story.

Much of Congress played the blame game -- trying to make it appear the other partisan side was responsible for what few wanted to admit was inevitable.

It's estimated that American banks would need more than $1T (that's trillion, and some estimate more than $2T) to be effectively re-capitalized to the level of being able to do significant lending without worrying about failing in the next few years. (see George Soros on this)

Why so much? Because the realistic losses from the credit bubble (mortgages, credit cards, commercial real estate lending, etc) are expected to be this much or more when we aren't pretending things are better than they are. But the jobs of the Fed chairman, Treasury Secretary, and other public officials are to instill confidence. They must acknowledge things are only as bad as we can see in the rear view mirror, and by the way -- don't panic.

The gigantic losses of banks and across the economy are the result of the end of a decades-long credit bubble.

------------------------

So....the tax rebates of summer 2008... Seems like a while ago, doesn't it?

Consider this graph from the Minneapolis Fed of The Recession in Perspective (our current recession is in red):



Notice something?

Yes, it seems this recession didn't drop off as steeply in its early months as normal. During the Summer of 2008 (months 5-8 in the graph), when things should have deteriorated more rapidly....the pace of the downturn was somehow slowed....business failures were slowed, bankruptcies were slowed, bank withdrawals (runs) were slowed, mortgage defaults were slowed, housing sales held up a little better....

What we know is the powerful recession we are in acted like a mild recession for many months, quite different from the typical pattern.

Did the tax rebate anticipation and arrival hold off the real power of this recession for many months? If so, did this slowing of the downturn help the "crisis"?

Well, the recession, like all recessions is in part psychological, and depends on confidence. The crisis is in part fear, and fear is the most powerful force in it, able to stop consumers, businesses, banks and jobs in their tracks.

Fear tends to feed on itself. The unusual staying power of confidence in the first 7 months of the recession held off a lot of effects. By slowing the downturn, the level of fear was held lower than it would have been and the "crisis" unfolded more slowly, giving the Fed and the Treasury and the FDIC more time to plan and act and learn.

We know the powerful driver of the recession is the collapsing housing bubble, and the associated consumer debt bubble and commercial real estate bubbles. The gasoline price spike added a powerful drag during the summer, and without rebate checks to offset the high prices, would likely have collapsed consumer spending much faster during the summer. The other powerful factor in any recession is the level of confidence. Consumers felt more confident for many months than is typical in a strong recession like this one.

Why? Well confidence is a combination of expectations and news and popular stories about what is happening. Consumers were told the stimulus was coming and it was thought it would help. Both the tangible reality of extra cash in our pockets and the belief it would help buoyed confidence.

The Tax Rebate of 2008 was the cause of the gentleness of this recession for months, in spite of the other huge forces that would make it a powerful recession, as is now evident.

We are also told the tax rebate failed because most of it was saved.

Consumers, instead of spending like nothing was happening, chose to pay down part of their credit card debts or save a good part of their rebates. Because they saved more, they've felt a little less pressure and a little safer ever since (than they would have at without that extra savings). Because we all have a little more money at hand still, it's likely we choose to eat out or buy discretionary items just a little more often than we would otherwise.

Put another way, as we have cut back spending, we haven't cut back as much as we would have without that extra in our pockets (or lower card balance).

Do the particular theoretical "multipliers" for different categories of stimulus spending favored by those opposed to tax cuts measure the effect of reducing fear and adding residual extra spending months later? If your guess is no, I bet you are right.

Having saved more, many of us now are spending a little more, supporting each others' jobs just a little better than we would have without that summer 2008 rebate.

Now....do you really think the Tax Rebate of 2008 didn't work?