The stress tests are a total joke. Anyone who believes these government reports is a fool.

@laserjobs: I would tend to agree that they aren't harsh enough, but I think it's a good idea if it were done properly. Wasn't something kind of similar done to help resolve the banking crisis in 1932?

Of course, if the problem is that these "stress tests" are too easy to pass, then what does that say about the banks that STILL failed them?

...economics be damned.

If we were worried about economics, we would have let the banks fail. The recession would have been deeper but shorter (plus it would have had the added effect of causing big companies to wise up and see that America isn't going to support failed business models).

The way we're going about it is going to make the recession shallower, but make it much more prolonged. It is also setting us up for a major bout of inflation as soon as the recovery starts. It also has the side effect of causing major businesses to see that they can run their business however they want, and be as unethical as they please, because once they get to a certain size the government will consider them "to big to fail" and write them a blank check.

*grumble* If a business is SO big and SO powerful that its failure would singlehandedly destroy the economy, how about we carve it up into little pieces that CAN fail if necessary without causing widespread devistation? (yes, I know this last part isn't really feasible and punishes success, I'm not actually for it)

@WiglyWorm: How is antitrust enforcement not feasible? I think it's one of the major things we need to get back to in this country. We wouldn't even necessarily need to carve companies up so much as prohibit a lot more huge mergers and acquisitions.

@WiglyWorm: And also, I don't agree that this is necessarily the wrong approach if you worry about economics. It's just a different economic approach from what you're advocating. I agree that ideally we should let bad banks go under, but there are larger concerns than just whether we're weeding out the bad banks and/or creating perverse incentives. If we let a bank like Citigroup go under, a lot of people with no direct connection to Citigroup would be collateral damage. That's why you need regulations and antitrust to prevent this sort of situation from happening, but now that it's happening I don't really see any better options than what we're doing.

Missing from this analysis is a discussion of:-

State and Local taxes
All kinds of taxes disguised as fees.

Here in NY State and City, they are talking about (not all have been approved):

-higher marginal income tax rates
-higher mass transet fees
-taxi fare surcharge
-auto registration tax increase
-tolls on currently free bridges and tunnels
-cell phone tax increase
-electricity tax increase
-sales tax increase
-cigarette / liquor / beer / wine tax incease

-a whole bunch of other stuff.

The "fees" are, of course, paid even by those exempt from income tax.

Be prepared for governments at all levels to take an increasing part of your income to spend it on what they want, not what you want.
-huge real estate tax increases

@johnva: I'm all for blocking more mergers... I definitely think we should in this country. Carving up existing businesses seems overly heavy handed to me, though.

@maxx22: The reason for this is that the state governments want to maintain their spending, while revenue has fallen due to the recession. And they don't have the powers the federal government does to just go into debt indefinitely. Isn't fiscal responsibility what people want and what Republicans are screaming about? Because either higher tax rates or spending cuts or both (most likely both) are required if you want fiscal responsibility in a period when tax receipts are declining. It's not the federal government that is driving this increased state taxation; it's the economy.

Sorry, posted on wrong board. Belonged with tax increase discussion.

there is no "failure" in the Obama world. Nothing will happen to these banks other than more taxpayer money will get shoved into their coffers.

Boy, I wish we followed the alternative: let 'em all fail. Let 'em all fail. Not do a damned thing. Uh huh.
Sure, we'd be living in a Mad Maxian wasteland fighting cats over rats for food, but we'd happily feed and clothes ourselves with the strength of our middle-school, righteous convictions!

@WiglyWorm: No, there is no guarantee whatsoever that the recession would be shorter. A smaller economy isn't just called that way because it's different, it called that because it actually produces less goods. Of course the debt involved in a bailout or any government spending has a cost, but you're ignoring the utility and potential growth gained from the loan itself.

Stress test - the funniest joke of 2009, along with "bend over and take it like a man"

@WiglyWorm: I don't really agree. I think that best interests of the nation need to come before the interests of individual companies (besides, I think I read somewhere that shareholder value wasn't really hurt very much in the long term by major antitrust actions in the past, since each of the carved out businesses was usually successful in its own right, and competition actually improved their efficiency). The only REAL problem I see with our antitrust laws is that the court system is horrible at handling them and the cases end up getting dragged out beyond the point where they are even relevant. By using a multitude of stalling tactics, large corporations can essentially kill an action against them. See: Microsoft. But that's more of an issue of corruption and stupidity of our court system rather than an inherent problem with antitrust.

@Trai_Dep: I agree. That's why I am grudgingly in support of the bailouts, even though it does truly piss me off that so much taxpayer money is going to the bankers who got us into this mess instead of to our actual pressing social problems such as infrastructure, health care reform, transportation, etc.

My main caveat is that we had better make damned sure that a) regulations are put in place so that this doesn't happen again for a long, long time, and b) that we pay back some of this debt once we get out of the recession a little bit without huge tax increases on the middle class. In other words, we had better drastically raise marginal tax rates on the truly mega-rich in order to pay down our debt. Just like we did to pay down our WWII debt. I don't see how this "national emergency" is any less worthy of that solution than WWII was, and I certainly don't like the alternative of having us take twice as long to pay down the debt.

@WiglyWorm: Well, you dislike Too Big To Fail institutions, in a world of Too Big To Fail Institutions. Yet you say, "Don't split up companies already Too Big To Fail, but only prevent more companies forming that are (well, you know).
Do you see a problem with 1/2 of your argument?

@maxx22: Where'd that come from?
You're that grumpy old guy sitting at the end of the bar yelling non-sequiturs to the crowd of people pointedly staring into their drinks, aren't you?

@exconsumer9: The sooner you weed out the weak links in the equation, the sooner the healing (economic expansion) can begin. The current scheme of things is going about trying to stick your finger in the dyke. And just prolongs things because the toxic elements are still in the equation. Further, as I said before, we will be having a period of somewhat rapid inflation as our recovery starts (our solution to the problem is to print money we don't have thereby devaluing our currency), making the problems even more complex.

@johnva: In theory it's great, and honestly I'd be all for it. It's just too thorny politically for anyone to want to get in to so it's not likely to happen. Even if it would be better for the economy and the businesses.

@Trai_Dep: Alarmist nonsense.

Why not just force them to have the cash they are loaning ? It works here in Canada, why not in the USA ?

Maybe there's something I don't understand, so if you have an explanation, feel free to say it.

@johnva: great point. these banks aren't big because of their success or profit, but b/c of senseless mergers.

@Trai_Dep: Well yeah of course there's a problem with it. Like I just said, I support it in theory but I know we live in the real world and the issue is too politically thorny so it's never going to happen.

@johnva: Yup.
Add, Put A Stake In The Shadow Banking System (they're already dead, but you know they'll try to resurrect themselves) and we'd go far in preparing ourselves for this century.
And words can't express my rage at the economic terrorism that has taken place.
A small number of people seem to think that there are those that are actually happy about our needing to step in, and they're deluded.
I'd also like to see a return towards surplus budgets - we've done it before, we can do it again. Just hope the faction that wants shiny new ponies for all their friends without paying for it doesn't raid these, as has happened before. Shifting the costs to children is beyond pathetic.

@maxx22: You know, I had never thought about it like that, but you're totally right.

I'm going to march right to my "all levels of government" right now and tell them to please stop providing us with services. I'll pay into my own private transit network, thank you.

@Trai_Dep: Also: thank you and ha!

@MrDo: taxpayer dollars aren't being given to the banks, it's being LENT to them. enormous difference. when the preferred shares are being converted to common shares, as is the case with citigroup, then the gov't is basically becoming an investor in the company and has the potential to profit, just like any other investor. either way it's not a handout

@WiglyWorm: Maybe so, but I find that statement pretty much equivalent to saying "well America is so hopelessly corrupt that we're doomed anyway, so we may as well not try to do anything to save it". That may well be so, but I'd rather go down fighting than just go gentle into that good night.

@laserjobs: I think that we can't rule out the injection of politics into these so-called "stress tests".

@TheMugs: How do banks make a loan if they don't have the cash? They take out a loan to make a loan?

@WiglyWorm: There's a lot of friction in the system to keep these behemoths lurching along. But if those on the left and right lobby our Reps, well let's just say votes are more valuable than dollars.
If not now, it'll never happen. The lobbyists will shrug, breathe a sigh of relief then argue it's time to move forward, or not engage in class warfare, or what have you.
It's an across-the-isle thing: it's to make our country great again.

@WiglyWorm: Don't forget that many of the people who caused these companies to fail are long gone with their load of cash.

These companies are not a "being" that can be made to regret making bad decisions. They are made up of people. If a small subset of those people don't care about bringing the company down and only care about making lots of money in the process -- which is what happened -- then making a company fail teaches no one a lesson except those in the company who care. And they don't need the lesson.

We need laws and regulations to ensure that people cannot get excessive pay without having that pay tied to future performance of their product. Additionally, we need to prevent companies from becoming too big too fail.

@TheMugs: They do, in theory. They're called reserve requirements. The problem is that, due to recent changes, the banks were able to move loans off their books thru securitization (selling the loans off to Wall Street in the form of opaque CDOs, etc.
If we go back to the rules that were in place, we'd do fine. That's all that most are asking for: a return to the scheme that worked so well in the past.

@Mr_Human: I'm not really sure but I think so. Or they are supposed to have it when the people will paid back the money that was given by the bank. And since too many people where unable to pay, the bank got in big problem. But since I'm not expert, maybe all I'm saying is just crap.

@Trai_Dep: Really excellent post, and I pretty much feel the same way. People who claim that liberals are HAPPY about the bailouts are deluding themselves and/or creating a dishonest caricature for political gain. In reality, most of us HATE the idea of that money going to poorly run corporations and greedy bankers, but we've looked at the situation like grownups and concluded that there isn't really any other better option. We think they are NECESSARY, not "good", because the bankers have us all over a barrel. I'd call what they're doing a threat of economic suicide bombing.

I really want us to go back to balanced budgets as soon as possible, but I know that it's going to take some time to absorb the damage that has been done to our country in a few short years. The sad thing that the teabaggers, et al don't get is that most of us liberals actually AGREE with them on the whole "generational theft" charge, in principle...we just disagree on who is doing the stealing and what we should do to mitigate the situation. They are apparently most concerned with keeping taxes low, while I care more about overall fiscal responsibility given our realistic need to spend money on government services.

@WiglyWorm: Doing nothing is a viable, rational alternative?

@Trai_Dep: The basic problem seems to be that the banks used financial "innovations" to evade and circumvent the fractional reserve requirements. They were able to move the loans into instruments that didn't "count" as loans on their books, but which they were still responsible for if too large a percentage went into default. Thus, they were able to benefit financially from making the loans, that ultimately they were still responsible for, without actually having to follow the regulations that were in place to ensure that they could handle some of those loans going into default. In principle mortgage securitization doesn't necessarily seem like it's a wholly evil idea to me, ASSUMING that proper regulations and safeguards are in place (and that is the part that was severely neglected in the recent past). For example, I don't believe that banks should be able to move those loans off the books if the contracts say that they may still be responsible for them in the event of failure (so either the banks should have to totally sever ownership responsibility for the investments and act totally as conduits to match borrowers with investors, or the banks should have to plan to cover losses if they do retain some responsibility for the loans). Also, if we're going to allow securitization, we HAVE TO crack down on credit ratings fraud by the big ratings agencies, and generally require much more transparency of the underlying loans within a securitized mortgage package. The banks shouldn't be able to just not do due diligence on a loan and then pawn off the risk on some other investor via ratings fraud (ie, calling a bundle with subprime mortgages in it AAA).

@Trai_Dep: Letting failed companies fail? Yes, I think it's the better alternative.

@laserjobs: Do you have a better testing method? Or should we return to the 'do nothing to look at potential problems' model?

@WiglyWorm: Prove it.

Look, I would LOVE to allow these corporations to fail. Some of them deserve it. I think allowing some of these companies, that were too greedy for their own good, to fail would be good for other struggling and emerging businesses. However, It's also possible that allowing these giants to fall would only crush everyone else. I'd rather help them stay on their feet for a while, protecting the majority of jobs and businesses which support them. It's just too big of a risk to let them destroy themselves.

@WiglyWorm: I don't agree. In principle I agree that it's better to let businesses that are insolvent fail, but my concern is for the fallout that that decision would have in the case of the banks. For example, letting people lose their deposits (which would still happen, as some deposits exceed FDIC limits, and it's questionable whether the FDIC's depleted funds could even back up the volume of deposits insured) would severely injure the economy and cripple businesses who did not fail at managing themselves. It would cut off the supply of credit to businesses that had nothing to do with the banks' failure. And most importantly, it would completely shatter confidence in the financial system.

Now that these banks are "too big to fail", we really have no choice. We just need to ensure that we aren't just encouraging future bad behavior by slapping new regulations on them and possibly breaking up some bank trusts.

@TheMugs: if you don't force them to have the cash on-hand, they can make many more loans (and therefore (in theory) make more profit on interest and fees)

@johnva: @Trai_Dep:

OK. You guys contact your reps and I'll contact mine. I'll even send some e-mails to moveon.org. In fact, let's have all of consumerist do it. Just demand that congress/the FTC

I'm serious. I'll do it right now. We'll see how far it gets us.

Even if the movement started to gain any traction, the right would oppose it because the politicians (at the behest of their rich buddies) would scream about big government damn liberal interferance. Those on the left might be more willing now than ever to support it, but even then I doubt it would ever get out of commission, let alone past a filibuster.

But hell, you're right. Let's do it.

@WiglyWorm: I regularly contact my reps on a variety of issues. But good idea - I'll write up something demanding reform and enforcement of antitrust laws. Maybe even giving limited antitrust powers to the executive branch would be a good idea, so that we don't have to have this stuff held up in court for decades.

John P. Hussman, manager of the $3.5 billion Hussman Strategic Growth:

The misguided policy response from Washington has focused almost exclusively on squandering public money and burdening our children with indebtedness in order to defend the bondholders of mismanaged financial institutions (blame Paulson and Geithner -- I've got a lot of respect for our President, but he's been sold a load of garbage by banking insiders). Meanwhile, I suspect that the little tapes in Bernanke's head playing "we let the banks fail in the Great Depression" and "we let Lehman fail and look what happened" are so loud that he is making no distinction about the form of those failures. Simply letting an institution unravel is quite different from taking receivership, protecting the customers, keeping the institution intact, replacing management, properly taking the losses out of stockholder and bondholder capital, and issuing it back into private ownership at a later date. This is what it would mean for these banks to "fail." Nobody is advocating an uncontrolled unraveling of major financial institutions or permanent nationalization as if we've suddenly become Venezuela.
Make no mistake. Buying up "troubled assets" will not materially ease this crisis, nor will it even improve the capital position of financial institutions (see You Can't Rescue the Financial System if You Can't Read a Balance Sheet). [...] We are simply protecting the bondholders of mismanaged financial institutions, even though that bondholder capital is more than sufficient to cover the losses without harm to customers. Institutions that cannot survive without continual provision of public funds should be taken into receivership, their assets should be restructured to better ensure repayment, their stockholders should be wiped out, bondholders should take a major haircut, customer assets should (and will) be fully protected, and these institutions should be re-issued to the markets when the economy stabilizes.

The course of defending the bondholders of insolvent institutions is not sustainable. Do the math. The collateral behind private market debt is being marked down by easily 20-30%. That debt represents about 3.5 times GDP. That implies collateral losses on the order of 70-100% of GDP, which itself is $14 trillion. Unless Congress is actually willing to commit that amount of public funds to defend the bondholders of mismanaged financials so they can avoid any loss, this crisis simply cannot be addressed through bailouts. Bondholders have to take losses. Debt has to be restructured. There is no other option -- but the markets are going to suffer interminably until our leaders figure that out.

THOR!

@WiglyWorm: I would support that type of "failure" (controlled temporary nationalization followed by carving them up and selling off their assets). I wouldn't support just letting them go down.

@johnva: I agree. Neither securitization or derivatives are inimically bad. They're useful and important, done correctly.
The problem was, in my mind, that the old (ha: just a decade ago) system had an ingenious, built-in policing function. Banks could make all the loans they wanted to, but with the loans sitting on their books, their balance sheet would be murdered the next year if too many bad loans defaulted.
It was a beautiful, self-regulating system. With Mark-to-Market rules, even improved (no more fanciful valuations).
Letting banks move these loans from their liabilities column - many of which turned out to be toxic - freed them of this built-in check. And within a few scant years, they destroyed trillions of dollars of assets gambling poorly.

So I'd be fine with some aspect of these recent innovations, so long as there was some systemic mechanism that served the same function, ideally without a lot of active monitoring from sometimes sloppy (or beholden) regulators. But the old system was so beautiful since it was organic and systemic.

Credit agencies need to use a different business model. How could they not give favorable reports?
Insurers either need to keep out of the complex securities game, or find a way to price risk accurately.
And all of these actions need total transparency, masking enough detail to protect trade secrets (but with regulators being able to unmask when needed).
And commercial and investment banks need to be split, and cut into manageable sizes.

Jeezus, though, it's a lot of work. I'm generally optimistic, but we've got a huge task ahead of us. Hope that Washington is up to the task.

@johnva: I appologise if it sounded like (and it probably did) I meant just let the banks crash and burn and take out a few city blocks with them.

@Trai_Dep: Yep, there is an overwhelming amount of reform that needs to be done. I guess the question is whether Washington has been totally corrupted beyond the point of no return or not.