But that just adds to the bad feeling about all this. Even Brad DeLong, who has been relatively sympathetic to the administration here, is disturbed by the idea that regulators are negotiating with the banks about the test results. Now it seems as if the report’s contents may also be dictated by what, based on the response to leaks, the informed public is willing to swallow. (”Would you believe it if we say Citi is fine? OK, what if we say they need $5 billion? Not enough? How about 10?”)
I hope I’m not being too cynical here. But it would be nice if the administration would, just once, do something to dispel that cynicism.
I heard one report on NPR last week that essentially the banks were arguing with the administration about the outcome of the stress tests, and that is why the results were pushed back a week. That really inspired confidence, and I hope they don’t give students everywhere ideas.
jwb
Actually, I think they are borrowing from the contemporary students’ playbook.
Napoleon
I did the same thing with my cardiologist the last stress test he gave me. He first told me I would be dead in 5 years if I did not change my ways but I managed to negotiate him up to 15 years (just joking, I have never had a stress test).
I have zero faith that Guenther and Bernanke are up to the job. Anyone worth a bucket of spit would have immediately told the banks to shove it and shut their pie holes the second they even remotely tried to negotiate anything, and then turn around and immediately release the results just to show the banks who is boss.
Hunter Gathers
Krugman cynical? Never.
How long until Krugman realizes that nationalization isn’t an option? Nationalization would require Congressional approval. And Congress could fuck up a PB&J right now.
I’d rather Giethner try whatever he has up his sleeve before handing any of this stuff over to Congress.
dmsilev
@jwb:
We’ll know for sure if that’s the case if the stress tests come back citing Wikipedia as a primary source.
-dms
Phoenix Woman
I’ve also heard that Obama had the results leaked as a way to keep the banks in line:
— “There’s another, possibly re-assuring explanation. The government is taking a page from the playbook of the banks.
— The leaks provide a source of “credible committment” — the government leaks of the numbers put a stake in the ground that the government can cling to, leaning against the arguments of the banks that they’re really OK.
— Because the administration would look really stupid if the results come out vastly different than what they leaked.
— This is, actually, the same strategy the banks used in doing all their Q1 earnings “pre announcements”…to put the government in a tough spot by publicizing great results that argue everything’s OK, and to gain leverage over the government.”
But of course Krugman has been dueling with Obama for the past two years now. The animus has affected his vision, to the point where even when he finally admitted yesterday that Obama and Co. had pulled us back from the abyss, he still had to surround that galling admission with lots of negativity, including a claim that while we weren’t heading over a cliff, we were heading for an L-shaped Japanese-type recovery, whereas even Dr. Doom is saying that we’re about halfway through a U-shaped recession and we should be a lot better off by this time next year.
anonevent
As smart as you are, Paul, satisfying your cynicism, or Limbaugh’s blustering, or McConnell’s need to feel important is not a requirement of the administration.
@Napoleon: Yep, it sure would be fun watching our credit-based economy function without the major banks.
Dan
Hi John. Re your piece on the Globe, they did have Charlie Savage until the NYT scooped him up. He was one of a very few journalists doing actual journalism during the Bush years. That’s a pretty big contribution from the Globe, don’t you think?
Napoleon
@anonevent:
Which of course is never going to happen because the FDIC will take them over.
Napoleon
@Hunter Gathers:
No it doesn’t, and in fact something like 30+ banks have already been nationalized this year with no Congressional approval.
Short Bus Bully
I really try to like Krugman since I was so stoked when he won his Nobel. However, instead of using the giant soapbox granted to him for something useful he has instead turned into Chicken Little, pissing his vaunted “authori-tie” into the wind. The guy has the political sense of a Republican ideologue, and by this time next year everyone will have forgotten all about his great award and he’ll be just another shrill partisan hack.
Shame really.
Hunter Gathers
@Napoleon: The banks we are talking about are much more than just banks. The FDIC is in no position to take over these institutions. They are just too damned big. And there’s no way in hell that the FDIC would be able to sieze the banks on a Friday and turn around and sell the assets to private investors by the following Monday, which is how they deal with smaller institutions. Let’s say the FDIC tries to take over say, ShitiBank. What if ShitiBank is unable to open the following Monday? Do you have any idea what the shitstorm that followed would look like? The only thing I am certain of is that I would stop recieving my paycheck for a while. ShitiBank processes my paycheck. No ShitiBank, no paycheck. I find that unacceptable. Krugman’s Swedish Solution is a pipe dream. Besides, ALL of the money dispersed through the TARP is coming back. Eventually.Or do you not understand the meaning of the word loan?
Napoleon
@Hunter Gathers:
There is nothing stopping the FDIC from operating the bank before they sell it. That has happened repeatedly in the past for bigger banks, including during the so called S&L crisis.
You really are clueless.
DanSmoot'sGhost
I haven’t seen, or looked for, much information about the stress tests or how they are supposed to work. But my reaction is, the public has to nut up here. This whole thing is an experiment, and we are running it against production resources. That is, it’s not being done in a lab, it’s being done on live resources. We’re playing with live ammunition. So of course there are going to be different views on what is going on and what things mean. So what? I’m brave, I play with live ammunition every day. Just tell me what the facts are and I will deal.
RP
It’s silliness like this that makes it really hard to take Krugman seriously sometimes.
Hunter Gathers
@Napoleon: Yep, I’m clueless
<blockquote<a “If you can put Heritage Community Bank out of its misery, why can’t you do the same with Citigroup?” Pelley asked Bair.
“First of all, I don’t talk about open and operating institutions,” Bair said. “We can only deal with the resolution of a bank, a federally chartered or state chartered depository institution. And these very large institutions that are creating the headlines now, these are really very large financial organizations. So, they have – it’s more than a bank. It’s a broker dealer. It’s offshore operations. It’s foreign deposits.”
http://www.cbsnews.com/stories/2009/03/06/60minutes/main4848047.shtml
gwangung
The irony in these two statements is in the Republican Party-class level.
Hint: Savings & Loan institutions are structurally dissimilar from the holding companies.
Rick Taylor
Brad Delong:
We need to save the banking system, not the banks.
Hunter Gathers
@gwangung: The other problem is once you decide do nationalize even one of these institutions, you have to do them all. Well, the top twenty or so of the larger so-called ‘banks’, anyway. And I highly doubt the FDIC is sitting on 10 to 20 trillion dollars.
gwangung
@Hunter Gathers:
That, too. The mechanics, the nuts and bolts is a lot more involved than a lot of people realize…
Zifnab
Oh please, what the hell did you think was going to happen?
If you passed out a test with several billion dollars on the line, how many of your students would come back to quibble over every point they could get? And if your students funded your faculty salaries directly (a la campaign contributions), how many other teachers would lean on you to at least give their papers another once-over?
Let the banks beg and foot stomp and threaten to call their parents over their grades. Then when the numbers are released and the corresponding details of the evaluation, we can decide what kind of curve the Obama Administration is grading on.
The Cat Who Would Be Tunch
Most of the banks were really in a position to pass these stress tests since the underlying assumptions used were pretty generous. Some examples include:
1. A nominal case where 2009 GDP is -2% followed by 2.1% gain in 2010, with unemployment being 8.4% for ’09 and 8.8% in ’10. And then the “adverse” case with GDP at -3.3% in ’09 and .5% in ’10. Unemployment numbers for this scenario would be 8.9% in ’09 with 10.3% in ’10.
Sounds reasonable? Only if you completely ignore the fact that in Q1’09, GDP was -6.1% and unemployment has already reached 8.5%. The “adverse” case is looking more like the nominal case. What happens to the banks if unemployment hits 11, 12, 13%? *shudder*
2. Common equity to capital ratios were set so that just about all banks would pass this. I think the requirement was along the lines of equity being >3% of capital. Funnily enough, one of the banks that falls short of this requirement is Wells Fargo sitting at about 2.5%.
3. Better management, portfolio etc. Think of this requirement as that fluff assignment that you get in school where the teacher is just trying to keep you “busy”. How are you supposed to evaluate how effective a bank’s management team is?
So, really, the results aren’t all that surprising.
On another note, one of the most intriguing tidbits I picked up recently is the fact that since the end of March, over 250 financial firms had recently withdrawn their applications to the TARP to get additional capital. It’s noteworthy because it may be a signal that the admin is considering to take a much more active/aggressive role in the financial institutionals that are request federal aid. So presumably, the firms that can do without the aid are backing.
Nick
Even nicer? If just once, Krugman would shut the fuck up.
gwangung
GOOD