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Written by José D. Roncal
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Friday, 30 January 2009 05:40 |
Lawmakers are looking for a quick fix for the banking and credit markets. No fix will be clean or easy. Every option comes with big hits to taxpayers, partisan bickering and the fact that no one knows what will work. Topping the agenda is a plan for creating a so-called Bad Bank, an entity where we could dump all the toxic assets that are currently sitting on bank balance sheets and damming up the flow of credit. By "dump," we mean purchase them from one bank and relocate them to the Bad Bank.
As you recall, a portion of Paulson's original $700 billion TARP proposal was to buy up these bad assets, but he changed his mind and bought preferred shares of banks instead. So, Paulson, how's that working for you? Never mind, we can read the news.
The Bad Bank plan may allow the government to rewrite some of these bad mortgages and lessen the crisis that has stripped more than 1.3 million Americans of their homes. But establishing a government-owned bank is not going to eliminate all the problems. For instance, why should we believe that simply purchasing toxic assets from one balance sheet and moving it to another will get the banks to start lending again?
First of all, who decides how much the banks will be paid for their bad assets? We all know that each mortgage-backed security is actually just a package made from bits and pieces of countless bad mortgages. No one knows what's in each one, much less how much each one is worth, so who decides the value?
If the Bad Bank takes on a hefty portion of these troubled securities, what happens to the private bank that originally owned the assets? We expect it means that many will be found to be insolvent and need to be shut down, or be partly nationalized, or completely taken over.
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Written by José D. Roncal
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Thursday, 29 January 2009 05:06 |
All eyes are on the current recession, but we tend to overlook the many U.S. recessions we've survived since the Great Depression. They’ve varied in length and severity and each had a slightly different cause and impact on the gross domestic product (GDP). But they've have also had similarities.
First, let's look at the defined differences between a depression and a recession. The definition of a recession is a decline in a country's GDP, or negative real economic growth, for two or more successive quarters of a year. In 2007, an economist at the Federal Reserve Board suggested that a combination of GDP and gross domestic income (GDI) may be more accurate in predicting and defining a recession.
A depression refers to a sustained downturn in one or more national economies. It is more severe than a recession (which is seen as a normal downturn in the business cycle).
The Great Depression from 1929 to late 1930s was marked by a stock market crash and a banking system collapse that sparked a global downturn, including a second but relatively minor downturn in 1937. This is where we'll begin listing a few key points about past recessions.
May 1937 - mid 1938: Roosevelt Recession
GDP declined by 3.4% and more than 4 million were unemployed (19.1%).
The stock market crashed in late 1937, an event that big business blamed on Roosevelt's "New Deal." The new Social Security Insurance program caused $2 billion to be held in a Federal trust fund, which meant vast sums of money were pulled out of circulation.
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Written by José D. Roncal
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Tuesday, 27 January 2009 16:43 |
We're now in the second week of the new Obama administration and his approval ratings are still hovering at a high 68%.
In spite of facing enormous challenges, or more likely because of them, he's hit the ground running and has set about to reverse some of the unpopular policies left from the previous administration. As promised, Obama has moved quickly to implement changes including his stimulus package, requirements for tighter Wall Street regulations and higher automobile pollution standards.
Obama and his carefully selected team are riding high and the country's hopes are riding high, but it remains to be seen how long the euphoria will last. People by nature have short memories and even though he has a lot of good will to expend in getting his agenda adopted by a Congress which now has Democratic majorities in both Houses, there are already questions regarding the viability of his proposed stimulus plan as well as opposition by advocacy groups related to other issues like stem cell research and family planning.
Some Republicans will vote no on the stimulus package because they believe it contains too much wasteful spending and doesn't do enough in the short term to create and save jobs. Others are calling for major rewrites and, as expected, Fox News has simply written it off as "socialism." But it appears that Obama has exerted a lot of effort in getting the Republicans' input in order to reach bi-partisan agreement, even attending a private dinner with ultra-right wing pundits, an act which simultaneously shocked, angered, and pleased his supporters.
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