Brad DeLong is properly skeptical

About the bank stress tests, 'results' of which have been endlessly leaked and/or trial balooned for a good week now:

Ummm... This Should Not Be Happening
Francesco Guerrera and Sarah O’Connor in the FT:

Bank objections delay stress tests: US regulators will delay the release of stress test results for the country’s 19 biggest banks until next Thursday, after some lenders, including Citigroup and Bank of America, objected to government demands that they needed to raise billions in fresh capital. Citi, one of the biggest victims of the crisis that has already been bailed out three times by the government, is believed to have been told by regulators that it needs more than $5bn in fresh capital, while BofA might need to convert $45bn in government preferred shares into common equity...

The banks should not be negotiating with the government over this.
There comes a point when the right thing to do will be to set up a Maggie Sue--a manufacturing, transportation, services, and other business loan-guarantee authority owned by the government, a financial GSE alongside Fannie, Freddie, and Ginnie--to guarantee "conforming" loans to operating companies, and let the major banks wither.

Remember: the purpose of a financial system is to make new loans so that operating firms can obtain financing on reasonable terms. We don't care what happens to the value of old loans or to current-bank stakeholders as long as companies going forward can get new loans.

Steve Waldman: Banks - we need a 'root and branch' fix....

Value for value, Steve Waldman

Excerpts:

If you think that our financial system just needs some tweaks, some consolidation of regulators' organizational charts and sterner supervision, then you should prefer that we had just cut a check, passed Sarbanes/Oxley Book II, and moved on. But that is not what I, or most proponents of nationalization/temporary receivership for insolvent banks, believe.

I ... would be willing to hold my nose and tolerate a Swedish-style guarantee of bank creditors. I'd acquiesce to that even without formal nationalization. Nationalization is ... a means to an end, and the desired end is a world in which too big to fail is too big to exist for any financial institution that originates or holds credit risk in any form. Secretary Geithner could send a bill to Congress today that would put all banks with a balance sheet of over $50B into run-off mode... I'd fax my Congressman and support a $2T on-budget buyout of bank creditors as part of that bill, as long as it had teeth. ("Teeth" would imply making sure that off-balance-sheet and derivative exposures were included in the size cap, etc.)
It's not that us pitchfork-totin' populists are unwilling to pay the bill. It's that we want to know that in exchange for writing a very, very large check, the people that we are paying will actually deliver the goods. Given the behavior of bankers before the crisis and of shifty policymakers during, we have every reason to watch warily and to insist upon every precaution while we hand over

Shades of Simon Johnson here.....

Shades of last year, yet again.....

Andrew Ross Sorkin, in today's Times: Stress Tests? No Big Deal After All

....here’s the rub: If some banks can’t pass this test — which William Black, a former senior bank regulator during the S.& L. crisis, has called “a complete sham” and others have suggested is a whitewash — perhaps we have a larger problem.

Maybe this test is going to show more failures than we thought.

Any banks that actually might “fail” the test, and I put those words in quote marks for a reason, will be given six months to raise new capital on their own or accept capital from the government.

But what private investor is going to invest in any of the failing banks, knowing full well that the government may end up coming in later on and diluting the investor’s stake?

This may end feeling a little bit like a replay of the government’s intervention in Fannie Mae and Freddie Mac. You’ll recall that Henry M. Paulson Jr., the former Treasury secretary, received temporary powers from Congress to take over Fannie and Freddie. At the time, he said he didn’t plan to use those powers, just the threat of them.

Really - this is getting eerie.....

Why oh why can't Team Obama simply get it over with? Yes, it'll be costly both politically and financially, but we keep fiddling while Rome burns, and zombie banks get increasingly desperate to appear alive (remember all those Q1 earnings fantasies?...)

On second thought, this is increasingly also looking like Japan in the 1990's.

Surprise! Citi and BoA need more capital!

Shocked, shocked: Fed Pushes Citi, BofA to Increase Capital

The most non-news news item in many years, but chalk it up in the good news category, if only because it seems to indicate some glimmer of reality leaking into proceedings. Some excerpts:

The findings suggest that government officials are using the stress tests to send a tough message to struggling banks. Bank of America and Citigroup have been the highest-profile problem children in recent months, but it is unlikely that they are the only banks the Federal Reserve has determined might need more capital.

Industry analysts and investors predict that some regional banks, especially those with big portfolios of commercial real-estate loans, likely fared poorly on the stress tests. Analysts consider Regions Financial Corp., Fifth Third Bancorp and Wells Fargo & Co. to be among the leading contenders for more capital. Wells Fargo declined to comment. Representatives of Regions and Fifth Third didn't respond to requests for comment made late in the day.

Not surprisingly, the geniuses who led us into this disaster are still in denial:

Executives at both banks are objecting to the preliminary findings, which emerged from the government's scrutiny of 19 large financial institutions. The two banks are planning to respond with detailed rebuttals, these people said, with Bank of America's appeal expected by Tuesday.

And, under the bad news column, file this gem of illogic:

....banks directed to raise more capital shouldn't be viewed as insolvent.

Two more little bits from the article I found amusing:

1. Bank of America's capital hole as measured by the regulators is in the billions, said people close to the company, placing added pressure on management as the company prepares for a Wednesday shareholder meeting in Charlotte.
2. It isn't clear how big a capital deficit Citigroup faces

That last one is just perfect. Kinda like figuring out how many holes it takes to fill the Albert Hall...

A glimmer of hope?

I think this week's leader in The Economist pretty much nails things: A glimmer of hope?

Selected excerpts, emphases mine:

Beginning with the subhead, after that sort-of-optimistic headline:

The worst thing for the world economy would be to assume the worst is over

..... two other slumps are likely to poison the economy for much longer. The most important is the banking crisis and the purge of debt in the bubble economies, especially America and Britain. Demand has plummeted as tighter credit and sinking asset prices have exposed consumers’ excessive borrowing and scared them into saving more. History suggests that such balance-sheet recessions are long and that the recoveries which eventually follow them are feeble.
The second slump is in the emerging world, where many economies have been hit by the sudden fall in private cross-border capital flows. Emerging economies, which imported capital worth 5% of their GDP in 2007, now face a world where cautious investors keep their money at home. According to the IMF, banks, firms and governments in the emerging world have some $1.8 trillion-worth of borrowing to roll over this year, much of that in central and eastern Europe. Even if emerging markets escape a full-blown debt crisis, investors’ confidence is unlikely to recover for years.

Here in America:

Consumer spending and firms’ investment will be dragged lower by the need to pay back debt and restore savings. This will be a long slog. Private-sector leverage, which rose by 70% of GDP between 2000 and 2008, has barely begun to unwind. At 4%, the household savings rate has jumped sharply from its low of near zero, but it is still far below its post-war average of 7%. Higher unemployment and rising bankruptcies could easily cause a vicious new downward lurch.

After reviewing the ugly situation in Japan, Germany, the UK etc, the summary begins:

....Add all this up and the case for optimism fades quickly. The worst is over only in the narrowest sense that the pace of global decline has peaked. Thanks to massive—and unsustainable—fiscal and monetary transfusions, output will eventually stabilise. But in many ways, darker days lie ahead. Despite the scale of the slump, no conventional recovery is in sight. Growth, when it comes, will be too feeble to stop unemployment rising and idle capacity swelling. And for years most of the world’s economies will depend on their governments.

......Welcome to an era of diminished expectations and continuing dangers; a world where policymakers must steer between the imminent threat of deflation while countering investors’ (reasonable) fears that swelling public debts and massive monetary easing could eventually lead to high inflation; an uncharted world where government borrowing reaches a scale not seen since the second world war, when capital controls ensured that savings stayed at home.

I much agree - especially the bit about a world of diminished expectations, led by a shrinking US consumer sector, and an era of great uncertainty

Not fair to the smaller banks?

It's increasingly looking like the stress tests will harm Regions Financial and maybe another one or two regional banks (Fifth Third gets mentioned a lot) while letting Citi and BoA (most notably) off the hook:

See this: Stress Tests May Force Banks to Convert TARP Stock

April 27 (Bloomberg) -- U.S. banks that received results of their federal stress tests last week were given three options if they need additional capital to withstand the recession. The reality is they may only have one.
Getting federal aid or selling shares -- two of the choices offered to the 19 lenders being tested -- aren’t practical politically or financially, according to analysts, including Jeff Davis, the research director at Howe Barnes Hoefer & Arnett Inc. in Chicago. Lawmakers have opposed adding more to the $700 billion that the government already committed and investors have balked at buying shares of financial firms after a two-year drop.
That leaves the third option presented by Treasury Secretary Timothy Geithner: changing the preferred stock held by the U.S. Troubled Asset Relief Program into common shares. Doing so would prop up capital under accounting rules and dilute the value of shareholdings for current investors.
SunTrust Banks Inc., KeyCorp and Regions Financial Corp., pegged by Morgan Stanley last week as the “most likely” to need capital, dropped more than 70 percent in New York Stock Exchange composite trading during the past year. Shares of the three companies were indicated lower in Germany today.
“The best most can hope for is to stay as they are and not be forced to draw down still more TARP capital or convert what they’ve got into common stock,” said Karen Petrou, managing partner of Washington-based research firm Federal Financial Analytics Inc.

If indeed the regional guys take it on the chin while the big boys don't, it will make this article particularly troubling: Geithner, as Member and Overseer, Forged Ties to Finance Club

No change in the patient

Good question from Macroman

This is perhaps a naive question, but it's one that your author has not seen clearly elucidated elsewhere. What, exactly, is the purpose of the stress tests? It seems fairly obvious that they are not intended as a sober measure of how the banking system would fare under conditions of extreme economic stress. If they were, then the scenarios would offer a bit more choice than "Optimistic and Optimistic (Roubini version.)"
So what, then? Political cover to enable payback of the TARP and/or further injection of funds? To make everyone feel wonderful that the banking system is actually in pretty good shape? (Macro Man would normally scoff at this, but after the market action of the last few weeks, he's not so sure.) In a post-FASB, "say whatever you want" world, what possible purpose does this charade have? Macro Man is curious to hear your thoughts.

My thought is that the stress test are political cover - make it look like the Feds are doing something while they desperately try to buy time for the recovery spending to kick in. Problem is that the recovery $$$ is too little and too back-ended, the banking crisis too severe, and the stress tests not stressful (nor transparent) enough.

Anyone wonder how CNBC got leaked word that only one of the 19 banks will 'fail'? (Stress Test Shows One Weak Link Bank )

Good will losses: "Things continue to get worse"

So says Feng Gu in this article: Losses in Good-Will Values Compound Bank Troubles

Some pretty amazing bits that leap out:

Banks wrote down more than $25 billion in good will in 2008, up sharply from $790 million a year earlier, according to data compiled by Frank Schiraldi of Sandler O’Neill & Partners. By the end of the year, banks still had $291 billion worth of good will on their books. An incomplete tally of write-downs from the first quarter showed that banks had taken a $3.5 billion hit to good-will values

....The value of good will represents intangible qualities like the value of a company’s brand name, its customer base and reputation. Every year, companies that list good will as a leftover asset from mergers have to test its value to see whether it has held up

In light of the ongoing and long-lasting consumer re-trenchment, does anyone really think most 'brand names, customer bases, and reputations" will retain their pre-recession values - or anything close to them? Save for a small few - Apple, WalMart, come to mind - it's gonna be hard to find a consumer brand that doesn't get hammered....(or whose good will has 'help up')

"The United States' Exorbitant Privilege"

Behold, from Mr Setser:

How much “capital flow reversal” insurance should the world offer?

Excerpt:

......it is still striking that the emerging world did more to help the US avoid adjustment from say early 2006 to mid 2008 than the US, EU and Japan seem likely to do (through the IMF and World Bank as well as bilaterally) to help the emerging world avoid adjustment now, even with the recent expansion of the IMF.***

Call it part of the United States exorbitant privilege. So long as key emerging economies peg to the dollar and allow their reserves to rise when private demand for their financial assets rises, the US gets more protection from a sudden reversal in capital flows than other countries with large deficits.

But also call it part of a broad system that has resulted in a persistent uphill flow of capital — and thus part of a broad system that led the US to run larger external deficits over the past few years than really were healthy.

That broad system is unsustainable, and in my view essentially ended in August 2007.

Thus far, not too terribly much has taken place to replace it. (There's a continuing hope that all might be well post-Great Recession) Not. But replace the existing system we must. For my money, it begins here in the US with an actual solution to the banking crisis (break up Citi and BoA, break the grip of Oligarchs etc...), moves next to an awareness that US 'consumers' are no longer such (Obama very much understands this), and then on to getting serious with China/Voldemort (and other large exporters) about over-capacity and currency manipulation....

Stress tests

This from a warning issued by The National Institutes of Health a few years ago:

"The number of Web sites offering health-related resources grows every day. Many sites provide valuable information, while others may have information that is unreliable or misleading."

Indeed.

See this from Bloomberg: Some analysts were more than a tad dismissive:

Some gems:

The report was “completely worthless,” said David Trone, an analyst at Fox-Pitt Kelton Cochran Caronia

My problem with this is sort of like Garrison Keillor and Lake Woebegon, where all children are above average,” said Nancy Bush, an independent bank analyst at NAB Research LLC

"A lot of triple talk,” said Jim Glickenhaus, who helps manage more than $1 billion, including shares of Bank of America Corp., at Glickenhaus & Co.

“The assumptions the regulators have used here seem to imply that they’re anticipating a bottoming out of the economic downturn,” said Jeff Davis, director of research at Howe Barnes Hoefer & Arnett in Chicago.

“The question I have, by using fourth-quarter numbers, is this skewed positively?” said Lawrence Kaplan, an attorney with Paul Hastings

“The anticipation over the white paper appears to be much ado about nothing,” said Josh Rosner, an analyst at independent research firm Graham Fisher & Co. in New York.

Bank stress tests - guesstimates

Interesting article in today's Times by Eric Dash, in which the 19 banks in question are ranked in some order of health: Edgy Banks Start to Get Word Today on Stress Tests

Citing estimates by Frederick Cannon of Keefe, Bruyett & Woods, it seems "banks might need as much as an additional trillion dollars in capital"

Dash's list of banks is as follows:

Poised to withstand potential worsening of the recession:

• Blackrock
• Goldman Sachs
• Morgan Stanley

Custodial banks with the worst behind them (taken their losses):

• State Street
• Bank of New York Mellon

Ditto, 'well-run commercial banks':

• JPMorganChase
• US Bancorp

'At the other end of the spectrum', need additional capital:

• Citibank (duh)
• Bank of America (duh)

Regional banks 'bracing for huge losses' (esp commercial loans):

• Fifth Third
• Sun Trust Banks
• Regions Financial

'Uncertain category' depending upon what regulators decide:

• American Express
• Capital One
• BB&T Bank
• PNC Financial
• Wells Fargo

Too big to behave

Simon Johnson, in arguing this morning for greater, more decisive action by the Feds on the banking crisis (Irreversible Damage: Why Little Action on Banking Can Do Great Harm) makes this excellent point:

If you think the big banks are strong today, as they increasingly defy the government, how easy do you think it will be to take actions against their interests down the road?

Indeed. From credit card abuses to defying the Feds on the Chrysler bailout, big banks are acting in their own interests as always, despite nearly destroying the global economy in the past year.....Incredible.

Here's a bit more from Johnson on the need for more decisive action:

......inaction on banks has at least four adverse consequences:

1. Banks will misallocate capital because of the perverse incentives that come from being undercapitalized; there is less incentive to make careful decisions when you think you may be out of business next year.
   
2. The recession will be deeper because of greater uncertainty regarding the stability of our financial system. Uncertainty is highly debilitating for all long-term decision-making; it undermines investment and makes banks even less willing to lend. The I.M.F.’s World Economic Outlook (start with Chapter 1), which came out on Wednesday, puts on a brave official face, but is really not encouraging — global growth at a record minus 1.3 percent this year and only plus 1.9 percent next year (aside: reasonable growth, as measured by the I.M.F., is 4 to 5 percent per annum).
3. 
   The Fiscal First strategy implies a large buildup of public debt to bail out industry and banks, and to provide a fiscal stimulus. While we “wait and see” on banking, our national debt grows, thus raising the taxes that all of us (and our children) have to pay down the road. A broader redistribution of post-tax income away from ordinary taxpayers continues.
4. 
   In geopolitical terms, China is taking advantage of United States weakness to strengthen its claim on natural resources and build political ties by providing finance to weaker nations. To maintain its political position, the United States needs to be decisive in economic terms and get back to growth sooner.

Itsworsethanyouthinkitis

The IMF is on board: Financial Stability Report

$4.1Trillion in debt losses.

You think any banks (or the Market) have actually properly accounted for these losses? Methinks not. Certainly not based upon the phony 'earnings' statements we've all just been subjected to.

More inevitable badness around the corner. The similarities to exactly one year ago are getting ever more striking.....

No doubt CNBC hosts will profess to being surprised come the fall when things again melt down.

Schlosstein: "We're in the 2nd or 3rd inning of bank losses..."

As in Ralph Schlosstein, co-founder of Blackrock, on CNBC. says bank losses in a deep recession have only just begun. Banks have eaten some sub-prime stuff, but there's much more to come from all sorts of other borrowers - CRE, credit cards, student loans, corporate loans, other housing etc etc.

Says systemic risk is still on the table. Geee, I wonder why all these banks keep fudging their earnings reports? It's becoming impossible to find any honest outside analyst who thinks the system is healthy. And more and more you're hearing from folks that there's worse still ahead of us.....

More on bank profits - "out of thin air"

Andrew Ross Sorkin chimes in:

Bank Profits Appear Out of Thin Air
By ANDREW ROSS SORKIN
Banks are trying to wow their audiences with better-than-expected numbers, but investors aren’t buying it for a second.

Some special gems, emphases mine:

Steven Roth, professor of management at the Tuck School of Business at Dartmouth College, also pointed out that Bank of America booked a $2.2 billion gain by increasing the value of Merrill Lynch’s assets it acquired last quarter to prices that were higher than Merrill kept them.

“Although perfectly legal, this move is also perfectly delusional, because some day soon these assets will be written down to their fair value, and it won’t be pretty,” he said.

Why can’t anybody read the room here? After all the financial wizardry that got the country — actually, the world — into trouble, why don’t these bankers give their audience what it seems to crave? Perhaps a bit of simple math that could fit on the back of an envelope, with no asterisks and no fine print, might win cheers instead of jeers from the market.

If the stress test is done honestly, it is impossible to believe that some banks won’t fail. If no bank fails, then what’s the value of the stress test? To tell us everything is fine, when people know it’s not?

“I can’t think of a single, positive thing to say about the stress test concept — the process by which it will be carried out, or outcome it will produce, no matter what the outcome is,” Thomas K. Brown, an analyst at Bankstocks.com, wrote. “Nothing good can come of this and, under certain, non-far-fetched scenarios, it might end up making the banking system’s problems worse.”

It's almost impossible to believe, but this banking situation is becoming more and more of a farce with each passing day....

Showdown looming; clueless bankers part mille

There's an excellent article in today's Times about the stresses building between balied-out banks and their government benefactors. Seems the banks are getting very itchy only a few months into the latest round of government propping-up, and are looking to change the rules ASAP as stress test results loom.

The general sense one is left with is that some banks are frantically gaming the system. They know how truly insolvent they are, and are desperately clinging to survival. In this regard, nothing has changed since August 2007...And read til the end, for an especially delicious bit reminiscent of Louis XVI.

Here's the article (by Stephen Labaton and Edmund L Andrews): Showdown Seen Between Banks and Regulators

Excellent reporting all around. Some particular juicy tidbits, emphases mine:

• Regarding bailout loans: banks are balking at the hefty premium they agreed to pay when they took the money.
• Regarding toxic assets: ...the Obama administration wants weaker banks to move more quickly to relieve their balance sheets of the toxic assets, the home loans and mortgage bonds that nobody wants to buy right now. But the banks are resisting because they would have to book big losses.
• Regarding stress tests: there is increasing anxiety in the industry that the administration could use the stress tests of the 19 biggest banks, due to be completed in the next three weeks, to insist on management changes....
• Regarding Obama's plans: Senior officials, recognizing that the next few weeks could prove pivotal for both the industry and the bailout effort, are moving ahead with major plans
• Regarding weak banks (read: Citi/BoA): The immediate concern for the administration is how to get the weaker banks to relieve their books of deteriorating mortgages and mortgage-backed securities. Industry analysts estimate that United States banks alone have more than $1 trillion of such mortgages on their books but have recognized only a small share of the likely losses. Economists at Goldman Sachs estimated recently that banks were valuing their mortgages at about 91 cents on the dollar, far more than investors are willing to pay for them. < Note - this is exactly the same point consisently noted by Whitney and Mayo...>
• Regarding how dire the situation is: Even though the Treasury Department plans to subsidize the purchases of toxic assets by giving buyers low-cost loans to cover most of their upfront cost, a growing number of analysts warn that many if not most banks will remain reluctant to sell.
  “The gap is still very wide,” said Frank Pallotta, a former mortgage trader at Morgan Stanley, now a consultant to institutional investors. “If every bank was forced to sell at the market-clearing price, you’d have only five banks left in the market.”
• Regarding shades of Spring, 2008: If the test indicates that the losses would leave a bank with too little capital, the bank will have six months to either raise extra money from private investors or get money from the government.
• Regarding Simon Johnson's Oligarchy concerns, look at this particular gem: Both large and small banks have pressed the Obama administration to make it less costly for them to exit the bailout program by waiving the right to exercise stock warrants the banks had to grant the government in exchange for the loans. At a meeting last month, the chiefs of three of the largest banks separately asked Mr. Obama to direct the Treasury not to exercise the warrants.
• Regarding cluelessness - well, I guess bankers can be incredibly clueless. Here's another absolute gem, from a hitherto obscure West Virginian banker named Douglas Leech: Douglas Leech, the founder and chief executive of Centra Bank, a small West Virginia bank that participated in the capital assistance program but returned the money after the government imposed new conditions, said he complained strongly about the Treasury Department’s decision to demand repayment of the warrants. That effectively raised the interest rate he paid on a $15 million loan to an annual rate of about 60 percent, he said. < OMIGOD!!! A banker bitching about predatory lending and high interest rates!! You cannot make this up. >
• But wait, there's more! Another pearl from Douglas Marie Antionette Leech: “What they did is wrong and fundamentally un-American,” he said. “Even though the government told us to take this money to increase our lending, the extra charge meant we had less money to lend. It was the equivalent of a penalty for early withdrawal.”

Folks buying into Wells' announcement of Thursday am are missing the forest for the trees. Many systemically important banks (and insurance firms) are insolvent, and no amount of fiddling with accounting rules and lobbying on Capitol Hill will change that reality. More chicken coming home to roost, starting in about 10 days, and continuing into the Fall as TARP 2, Son of TARP, Son of PPIP, etc etc are rolled out.

To beat a dead horse: not until a number of these institutions are temporarily nationalized (pre-privatised),their toxic assets quaranteened from healthy ones, and the institutions broken into smaller, more rational pieces, will this crisis begin to get resolved. (One example of such 'rationalization': Combine Citi's cards and deposit/retail bank units with Amex. You'd have a powerhouse lender with a healthy deposit base which is used to support that lending, not to prop up losses in derivatives. Hundreds of smaller such much-needed rationalizations are out there. Bankers must stop clinging to never-workable supermarket models.)

I'm increasingly reminded of Spring 2008

All this talk of "the worst is behind us, we've got a grip" is eerily similar to the happy talk post Bear collapse last March/April

A stock rally, optimism on CNBC (what else?), actions by the Fed, analysts calling bottoms in housing, autos, etc, etc etc are in many respects the mirror image of last year at this very time.

What no one still really seems to want to admit as ever - save Obama in the least-reported line from his European trip (Obama: The American "voracious consumer market" has ended) - is that the US consumer is tapped out. And that consumer is even more tapped out now than last year. In fact, they're broke, and have no access to credit, and jobs are disappearing.

Until I hear a credible argument as to how and why folks will start spending like it's 2007, or 1999, or 1985, I cannot believe in any kind of recovery any time soon...

September will be interesting.

Merkel's scary quote

In today's Herald Tribune interview, she utters these unsettling words, in the context of resisting urges to get on the stimulus bandwagon:

“International policy is, for all the friendship and commonality, always also about representing the interests of one’s own country,”

Alas. Here is the crux of the problem, in one tidy sentence. When the leader of Europe's largest economy (and the third largest in the world, after the US and Japan) speaks in such a bluntly nationalistic tone, we're all in trouble. And while Gordon Brown is sending us happy signals (British PM Points to Coordinated Progress Before Economic Summit) that Europe will be united at the G-20, Ms Merkel could not be more starkly in opposition to anything 'coordinated' along the US/UK model of fiscal stimulus and bank rescues.

And Ms Merkel certainly has skin in the game. As the Herald Tribune points out "she finds herself at the helm of the world’s largest exporter of goods at a moment when world trade is collapsing". (In her defense, she also finds herself the leader of a rapidly aging populace, making spending challenging and deficits more difficult- tho by no means impossible - to finance in the future). Let's not lose sight of the fact that Germany is one of the world's largest surplus nations. If surplus/export nations feel they do not need to act on fiscal stimulus, look out below! And do note that China - another massive surplus/export country - has itself embarked on a massive stimulus program. Germany could learn a lesson from the Chinese, it would seem, if not from the Americans and our deficits.

Per Martin Wolf, one should never expect much economic leadership from the Europeans. But you'd think that the leader of the world's largest exporter would be keenly interested in finding ways to stimulate global demand in the midst of a 'collapse' in global trade and the worst economic crisis since the 1930s. I rather think that could even be construed as being in Germany's self-interest and be marketable in a re-election campaign....

Merkel is acting as though this crisis is not as bad as it is. (She's not alone in this - see Congressional Republicans, for one large group in denial.) Recall how she pretty high-handedly refused to help out Central and Eastern European nations a few weeks ago. There's one more quote along these lines which struck me: “On an international level, we must all recognize that after the crisis we need to return again to solid financial policies" "After the crisis...."? What an amazingly passive construction! Sounds to me that the German Chancellor is assuming that this crisis will somehow magically solve itself, and shall soon pass, and that Germany thus need not change anything it's been doing for years now.....

Such thinking seems guaranteed only to deepen this crisis.

Here's the article: Merkel Is Ready to Greet, and Then Resist, Obama

"Private Assets" continued

More from Dr Setser:

It increasingly looks like the US is inching toward severely diluting the common equity of a set of banks where sovereign funds have substantial stakes, if not wiping out the existing equity entirely. That potentially — as Larry Summers warned in a former life — is a foreign policy issue. Summers pondered this topic at last years Davos session on sovereign funds:

[Suppose] the SWF of country A makes an investment in a major bank in country B. The bank gets in big trouble. Is there any control in the world that can assert, that with billions of dollars on the line, their head of state and foreign minister are not going to get involved in the negotiations?


Me, Keating, here now: So, as we lead the world towards economic collapse, we're actively going out of our way bite the hands that feed us...

Tell me why this makes any sense whatsoever

What does make sense is to nationalize all US banks with assets over $5Billion ASAP, sort out the mess and the lies, fire most of 'management' at most large banks, and then perform the necessary triage (eg let Citi and BoA die).

No one is too big to fail.

Except the US. But if we do not deal with reality sooner rather than later, look out below