Solving the budget deficit

The NY Times has a site up for addressing the budget deficit. In opposition to the usual Versailles claims about how hard it is to solve the deficit, I found it pretty easy. My proposal fixes it, essentially by returning to Clinton tax policy, taking the peace dividend, and taxing two activities with substantial negative externalities: CO2 emission and risky bank activities. I don't have to do a thing to Medicare or Medicaid. Other people with radically different political preferences don't seem to find it too hard either. Try it yourself!

Greece and stability

Stability has been much discussed lately but with little useful results. The real problem is not Greece, but that irresponsible finances in *one* medium-to-small country of no major international significance (not a banking center, source of a critical natural resource, etc.) threatens the world economic system. That is seriously unacceptable instability. If the survival of the world economic system requires that *every* country with a GDP larger than um, Massachusetts behaves responsibly at all times, we're doomed.

(Posted as a comment to Naked Capitalism)

The Public-Public-Public-Public-Public-Public-Public-Public-Public-Public-Public-Public-Private Investment Partnership

Timothy Geithner's plan to get money to the banks was released today. One of the guiding principles is:

Maximizing the Impact of Each Taxpayer Dollar: First, by using government financing in partnership with the FDIC and Federal Reserve and co-investment with private sector investors, substantial purchasing power will be created, making the most of taxpayer resources.

But when you get into the details, you find the plan is for 50/50 public/private equity supported by 6:1 leveraged borrowing from the public sector. That means 12 dollars of public money goes in for every 1 dollar of private money, making this the PPPPPPPPPPPPPIP of the title. So, does Geithner actually believe that this is making the most of taxpayer resources? I have to grant that he seems to believe CDO's of mezzanine subprime MBS tranches are "undervalued", which is even less plausible. Foolish or dishonest? You decide.

In the "Legacy Securities Program" Geithner continues to promise he'll develop a plan - someday.

Borrowers will need to meet eligibility criteria. Haircuts will be determined at a later date and will reflect the riskiness of the assets provided as collateral. Lending rates, minimum loan sizes, and loan durations have not been determined. These and other terms of the programs will be informed by discussions with market participants. However, the Federal Reserve is working to ensure that the duration of these loans takes into account the duration of the underlying assetsBorrowers will need to meet eligibility criteria.

Yes, Geithner has known that we have a lot of bad loans since at least the fall of Bear Stearns a year ago. Yes, he has been involved in multiple negotiations trying to save companies loaded with bad debt over the past year. Yes, he has supposedly been working hard on this for at least 4 months.

No, that quote is not from the Onion.

The right amount of quantititative easing.

Krugman has a post up expressing approval of the Fed's announced intent to buy 1 trillion in long-term bonds. I'm all for quantitative easing (I wonder what Orwellian instinct causes them to avoid the proper phrase "printing money") but not on this scale. M1 is only about 1.6 billion (and was less that 1.4 last summer) so this is about a 60% increase in the money supply, coming on the heels of some significant printing in Q3-Q4 2008. Crudely, you'd expect about 60% inflation from this and that's far too much. As Krugman points out, the prices of these bonds will drop as the economy recovers and interest rates decrease. So even if the Fed pulls back as hard as it can in a year or so we're still left with about a 15% increase and I very much doubt the Fed will pull back even that hard as IMO that would throw us into a depression.

I think a better guide would be to print enough money, excuse me, "quantitatively ease" enough, to keep the leading indicators moderately positive. That should be enough to get us out of recession without risking the worst inflationary shock since the Constitution was written.

Tranche warfare, in earnest.

I have seen some discussions about how differing interests of differing tranches could potentially lead to some pathological results, but here's a real example : Carrington Investment Partners LP vs. American Home Mortgage Servicing.

Carrington bought some junior tranches that apparently have the right to control disposal of REOs in the pool (there are legal fights now over whether they do). As long as the REOs aren't sold, the junior tranche gets its scheduled payment. Once the REO is sold, the proceeds are dived starting from the seniormost tranche, which in this case will leave Carrington's tranches in the cold.

So Carrington is trying to force the servicer to keep the REOs, unsold, presumably until they rot into uselessness. Sure that screws over the senior tranches, nearby homeowners, and the economy as a whole, but hey! a hedge fund has to make a buck! Go free market!

Are you ready to be Geithnerized?

Geithnerize, vb: To make somebody grossly overpay for something, and still end up not owning it.

The core problem for the banking sector is that the banks have lost far, far more money than they could have and remained solvent. As Yves Smith pithily puts it:

Let's start with the basics. The US banking system is insolvent. Got that? Insolvent. That does not mean every bank in the US is toast, in fact quite a few are probably just fine, and another large group is no doubt hurting and undercapitalized, but ... a significant portion of the very biggest banks are insolvent.

The fair solution is that the insolvent current banks have to be shut down, their owners wiped out, their managers fired, and new banks started with new owners, new managers, and new capital. Fair, efficient, and straightfoward - but it will ruin many of those responsible for the disaster, especially current bank management. Their solution? Make the taxpayer pay to keep them rich - via Geithnerization!

We've already had a lot of Geithnerization already - the TARP, which overpaid by at least 87 billion for equity that doesn't carry voting rights; the Citibank bailout, where the US government gave Citibank guarantees so grotesquely underpriced they won't even let us find out what they guaranteed; and the similar BOA bailout. And the public is getting wise to the Geithnerization process.

So the new Geithner plan cleverly dresses up another (and huge!) round of Geithnerization with some platitudinous frills (but little substance) to disguise the ravenous monstrosity at the core of the plan. Lurking at the core:

a) TARP style useless equity in the "Capital Assistance Program". Undercapitalized banks get money from the treasury in return for preferred shares - inevitably underpriced, since the bank are undercapitalized. The preferred shares aren't voting, so no control over the bank for the taxpayer who's going to pay so much for it. Just like with Citi, we get to pay more than the banks are worth, and somebody else still owns it.

b) A "public-private investment fund" which will take equity mostly (read all) from the private sector to take loans from the public sector to buy assets that can't be valued accurately. Result: if the assets go up, the private investors take all the gains; if they go down private investors lose a little and the public loses a lot on the bad loan. Geithnerization for uncertain assets!

The plan has some nice-sounding frills calling for bank audits (but with no specifics), posting some information to the Web (but again, no details), and some expanded programs for mortgage modification. Of real merit is a plan to expand the Term Asset-Backed Securities Loan Facility (TALF) to 1 trillion. This really helps, because as I've said, the fundamental solution is to have new bank with new money take over lending. With the TALF the Federal Reserve will be doing it. Of course the point is that since Geithnerizing the public won't actually help the credit market, they needed to put in a program that would. We don't have to rip off the public to expand the TALF.

But no detail can disguise the 1 trillion plus plan to make the taxpayer pay for investors to own and get rich on assorted shady assets. But what do you expect when you appoint a Treasury secretary whose primary goal is saving the banks from nationalization?

Are you ready to be Geithnerized now?

Recessionary employment declines

In response to some widely circulated and controversial charts of employment declines in major recent recessions, I took a look at the employment to population ratios. I looked at the recessions from an employment ratio perspective, starting at peak employment ratio and continuing until it recovered. The conclusions are somewhat surprising.



First, some recessions merge. The 1980 and 1981-82 recessions do, and we have never gotten out of the 2001 recession. 2001 on kind of looks like a Long Recession by this measure, and may be turning into a Long Depression. The current recession by itself (2007) does indeed show up as bad - it's the worst of all at 25 months. It's not quite as bad as the 1981-82, but it's very close, and it's worse than everything else, including 1974-75 (except of course 2001 with 2007 added on). Also, the lurch downward over the past 7 months is unprecedented and worse than anything else, although the 1974 lurch down is very close. Another bad month will make the 2007 recession unsurpassed.