Here’s a breakdown of the numbers. The report, citing White House budget office figures, estimated $46 billion of costs under the Troubled Asset Relief Program to support struggling homeowners. It showed $2 billion of overall gains on the Treasury’s investments in various bailed-out companies, such as American International Group Inc. (AIG), some of which are held outside of TARP. Other Treasury programs to buy mortgage-backed securities and to guarantee money-market funds would produce $26 billion of gains, the report said.

Add up those categories, and the projected net cost so far is $18 billion. On top of that, there’s the current net cost of the government-sponsored housing financiers Fannie Mae and Freddie Mac, which the Treasury pegged at $151 billion. So how did Treasury project a potential gain overall?

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[Scott] Pelley: How would you rate the likelihood of dipping into recession again?

[Ben] Bernanke: It doesn’t seem likely that we’ll have a double dip recession. And that’s because, among other things, some of the most cyclical parts of the economy, like housing, for example, are already very weak. And they can’t get much weaker. And so another decline is relatively unlikely. Now, that being said, I think a very high unemployment rate for a protracted period of time, which makes consumers, households less confident, more worried about the future, I think that’s the primary source of risk that we might have another slowdown in the economy.

Pelley: You seem to be saying that the recovery that we’re experiencing now is not self-sustaining.

Bernanke: It may not be. It’s very close to the border. It takes about two and a half percent growth just to keep unemployment stable. And that’s about what we’re getting. We’re not very far from the level where the economy is not self-sustaining.

The debate on Capitol Hill this week is over whether to extend the Bush tax cuts, which would likely increase the budget deficit.

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Foreign banks were among the biggest beneficiaries of the $3,300bn in emergency credit provided by the Federal Reserve during the crisis, according to new data on the extraordinary efforts of the US authorities to save the global financial system.

The revelation of the scale of overseas lenders’ borrowing underlines the global nature of the turmoil and the crucial role of the Fed as the lender of last resort for the world’s banking sector.

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The bailout became law because the legislative branch was stampeded with the threats of certain doom. It vested unprecedented economic authority in a single unelected official, the secretary of the Treasury. And it used public funds to insulate well-connected private actors from the consequences of their recklessness. Its creation short-circuited republican self-government, and its execution created moral hazard on an epic scale. It may have been an economic necessity, but it felt like a travesty nonetheless.

This is why it should be possible to both sympathize with the politicians who voted for the bailout and welcome their rebuke at the ballot box. Faced with extraordinary circumstances ”” wars, natural disasters, economic crises ”” political leaders will always incline toward a blunt utilitarianism, in which the need for stability trumps more high-minded ideals. But after a crisis has passed, it’s immensely important that the ideals reassert themselves, so that the moral compromises made amid extraordinary times aren’t repeated in ordinary ones as well.

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The U.S. government will face pressure to bail out struggling states in the next 12 months, said Meredith Whitney, the banking analyst who correctly predicted Citigroup Inc.’s dividend cut in 2008.

While saying a bailout might not be politically viable, Whitney joined investor Warren Buffett in raising alarm bells about the potential for widespread defaults in the $2.8 trillion municipal bond market. She said state and local issuers have taken on too much debt and that the gap between public spending and revenue is unsustainable.

“People will think the federal government will bail these states out,” Whitney, 40, the founder of Meredith Whitney Advisory Group Inc., said in an interview on Bloomberg Television’s “In the Loop.” “It’s going to be an incredibly divisive issue.”

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Bob Moon: What’s the rush? That’s what investment consultant Chris Whalen was asking today at Institutional Risk Analytics. He says the government seems to be in a hurry to get the word out that it’s aiming to start unloading its $49 billion in AIG shares within the coming year. Whalen warns the market isn’t ready and won’t support it.

Chris Whalen: We’re trying to do a public offering of shares in a company that can’t stand by itself, that has to have government support. That’s not going to work.

Flooding the market with shares, he cautions, is a money-losing proposition. He says it’s the same catch-22 the government faces with General Motors, and has already run up against trying to sell its Citigroup shares. Gauging by AIG’s total market capitalization — the value of all outstanding shares — he argues the idea of taxpayers making all their money back is pie-in-the-sky.

Whalen: The market cap of this company is single digits. They owe us $100 billion, right? So what the market’s telling you is that the company is worth, today, a tenth of what they owe us.

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Pundits are restless, an election looms ”“ so this week, President Barack Obama is proposing yet another round of special favors, aimed at improving the economy. Prominent columnist Paul Krugman wants the plans to be “bold” and to involve huge amounts of money. Here’s a contrasting view: government should stop declaring recovery plans, bold or otherwise.

Maybe the constant announcing of new plans ”“ especially plans backed by borrowing or tax cuts ”“ is, itself, an impediment to economic growth.

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We don’t have alternative universe laboratories to run control bailout experiments, but we can imagine the alternative outcomes if different actions were taken.

So let’s do just that. Imagine a nation in the midst of an economic crisis, circa September-December 2008. Only this time, there are key differences: 1) A President who understood Capitalism requires insolvent firms to suffer failure (as opposed to a lame duck running out the clock); 2) A Treasury Secretary who was not a former Goldman Sachs CEO, with a misguided sympathy for Wall Street firms at risk of failure (as opposed to overseeing the greatest wealth transfer in human history); 3) A Federal Reserve Chairman who understood the limits of the Federal Reserve (versus a massive expansion of its power and balance sheet).

In my counter factual, the bailouts did not occur. Instead of the Japanese model, the US government went the Swedish route of banking crises: They stepped in with temporary nationalizations, prepackaged bankruptcies, and financial reorganizations; banks write down all of their bad debt, they sell off the paper. Int he end, the goal is to spin out clean, well financed, toxic-asset-free banks into the public markets.

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The administration’s second assumption, meanwhile, is a matter of academic theories about the sizes of the relevant economic multipliers. Textbook Keynesian economics tells us that government-purchases multipliers are larger than tax-cut multipliers. And, as we have seen, the Obama administration’s economic team consulted these standard models in deciding that spending would be significantly more effective than tax cuts.

But a great deal of recent economic evidence calls that conclusion into question. In an ironic twist, one key piece comes from Christina Romer, who is now chair of Obama’s Council of Economic Advisers. About six months before she took the job, Romer teamed up with her husband and fellow Berkeley economist David Romer to write a paper (“The Macroeconomic Effects of Tax Changes”) that sought to measure the influence of tax policy on GDP. Crucial to the Romers’ method was their effort to identify changes in tax policy made during times of relative economic stability, and driven by a desire to influence economic behavior or activity (to encourage growth, say, or reduce a deficit), rather than those changes made in response to a recession or crisis. By studying such “exogenous” tax-policy changes, the Romers could be more confident that they were in fact measuring the effects of taxes and not those of extraneous conditions.

The Romers’ conclusion, which is at odds with most traditional Keynesian analysis, was that the tax multiplier was 3 ”” in other words, that every dollar spent on tax cuts would boost GDP by $3. This would mean that the tax multiplier is roughly three times larger than Obama’s advisors assumed it was during their policy simulations.

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A new Time poll reveals just how hard the task is: Two-thirds of respondents say they oppose a second government stimulus package. And 53% say the country would have been better off without the first one.

The result is a White House pulled in three directions at once as it tries to repair the economy ”” and ensure that Obama and the Democrats can survive a rising tide of public anger. First, the Obama team is improvising ways to pass piecemeal spending items through a Congress where stimulus has become a toxic word. At the same time, the White House is signaling its concern about that budget deficit that has Tea Partyers raging ”” both through token gestures, like a White House contest that lets the public vote on cost-cutting ideas submitted by federal employees (the winner gets to meet Obama and see his or her idea go in the President’s next budget), and through Obama’s support for the work of a bipartisan deficit commission. And finally, the White House is trying to explain to angry liberals that it’s doing everything possible to keep the economy moving and fight Republican resistance to new spending.

It’s a delicate balancing act, on a par with Obama’s effort to pass health care reform without appearing to get too involved in the details. And just as it did in the health care battle, the future of Obama’s presidency ”” as well as the fate of the American economy ”” may hang on the outcome.

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To believe Christopher Dodd, the Connecticut Democrat who is chairman of the Senate Banking Committee, the end of government bailouts is near. In truth, the financial-overhaul legislation now before Congress would do little to arrest the bailouts already in progress.

When the U.S. government rescued American International Group Inc. in 2008, it reasoned that a disorderly failure of the financial-services giant would lead to an economic catastrophe. What the Treasury and Federal Reserve said they needed was a way to wind down systemically important institutions without sending them into bankruptcy courts, to keep the companies from triggering defaults on their obligations that would cascade throughout the broader financial system.

Congressional leaders say their final bill will deliver the resolution authority regulators have been seeking. “It will end bailouts, ensuring that failing firms can be shut down without relying on taxpayer bailouts or threatening the stability of our economy,” Dodd said June 10 at the House-Senate conference committee where the differences between the two chambers’ bills are being negotiated.

It wouldn’t end AIG’s rescue, though. The reason AIG hasn’t failed is that the Fed and the Treasury continue to stand behind it. There’s no sign this will change anytime soon. Nor would the legislation force the government to do otherwise.

Read the whole thing.

“My best guess is that we’ll have a continued recovery, but it won’t feel terrific,” Ben S. Bernanke, the Fed chairman, said at a dinner at the Woodrow Wilson International Center for Scholars on Monday night. “And the reason it won’t feel terrific is that it’s not going to be fast enough to put back eight million people who lost their jobs within a few years.”

One could almost envision the winces in the White House as Mr. Bernanke observed that the unemployment rate “will stay high for some time.” He went on to note that even if the economy grew at 3 percent, which would be considered a healthy pace, it would do little more than keep pace with the normal rate of growth of the work force.

Virtually every day of late, White House officials have struggled to explain how their strategies to provide economic stimulus to bring down the unemployment rate square with Mr. Obama’s oft-expressed commitment to tackle a record budget deficit. They talk about spending this year ”” in modest amounts ”” while waiting for the prescriptions of the president’s commission on debt reduction, which reports, conveniently, a few weeks after the midterm elections.

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It is past time to end the conspiracy of silence about Fannie Mae and Freddie Mac, government-sponsored companies that buy and sell mortgages and related securities. Both were taken over by the Treasury Department in 2008. So far Washington has shelled out $140 billion to keep them afloat. A Congressional Budget Office study says their losses could reach $400 billion. Other estimates put them at $500 billion.

In contrast, the net cost to date of TARP, after loan repayments and other government income, is $172.5 billion, nearly half of which is owed by the auto industry.

While optimists foresee the repayment of most TARP funds, the same cannot be said of Fannie and Freddie, which own well over a trillion dollars in risky mortgages and mortgage-backed securities.

Unlike TARP funds, the subsidies to Fannie and Freddie do not show up in the government’s budget. If they did, it would be even further out of balance.

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When U.S. authorities faced financial panic in 2008, their first response was to pump liquidity into the system. It was access to credit, not the quality of credit, that was the issue, they thought.

It turned out they were wrong. U.S. banks were facing a full-fledged solvency crisis. They owned assets that weren’t worth the paper their financial statements were printed on. Congress appropriated $700 billion to recapitalize the banks.

Fast forward 19 months and travel east across the Atlantic where Europe’s leaders confronted a home-grown sovereign debt crisis, a rout in financial markets and a loss of confidence in the euro. Their solution? Lend more money to already indebted countries.

Europe’s leaders must have been snoozing in the back row when the teacher conducted the TARP review class. (TARP stands for Troubled Asset Relief Program.) You can’t recapitalize a sovereign nation by issuing more debt. In the same way that more lending couldn’t enhance U.S. banks’ capital adequacy, “extending more credit to (European) nations that can’t service their accumulated debt won’t make them more creditworthy,” says Carl Weinberg, chief economist at High Frequency Economics in Valhalla, New York.

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Despite a real estate implosion, property tax revenue collected by states and localities actually rose 2.7% last year to $421.8 billion.

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The Federal Reserve’s Flow of Funds report reveals more deleveraging, with U.S. debt growing at the slowest pace on record and nearly offsetting the huge rise in federal debt. Nonfinancial debt increased at just 1.6% annually, to $34.7Trillion.

Moneyquote:

Household debt contracted at an annual rate of 1¼ percent in the fourth quarter, its seventh consecutivequarter of decline.

You can check the full document out here (pdf and a long one).

The US economy is in a mess ”“ even if growth has resumed, and bankers are once again receiving huge bonuses. More than one out of six Americans who would like a full-time job cannot get one; and 40% of the unemployed have been out of a job for more than six months.

As Europe learned long ago, hardship increases with the length of unemployment, as job skills and prospects deteriorate and savings gets wiped out. The 2.5-3.5 million foreclosures expected this year will exceed those of 2009, and the year began with what is expected to be the first of many large commercial real-estate bankruptcies. Even the Congressional Budget Office is predicting that it will be the middle of the decade before unemployment returns to more normal levels, as America experiences its own version of “Japanese malaise….”

Three things can make a difference: a second stimulus, stemming the tide of housing foreclosures by addressing the roughly 25% of mortgages that are worth more than the value the house, and reshaping our financial system to rein in the banks.

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It is payback time for Fannie Mae and Freddie Mac on some mortgages sold to the finance companies by lenders.

Stuck with about $300 billion in loans to borrowers at least 90 days behind on payments, Fannie and Freddie have unleashed armies of auditors and other employees to sift through mortgage files for proof of underwriting flaws. The two mortgage-finance companies are flexing their muscles to force banks to repurchase loans found to contain improper documentation about a borrower’s income or outright lies.

The result: Freddie Mac required lenders to buy back $2.7 billion of loans in the first nine months of 2009, a 125% jump from $1.2 billion a year earlier. Fannie Mae won’t disclose its figure, but trade publication Inside Mortgage Finance said Fannie made $4.3 billion in loan-repurchase requests in the first nine months of 2009.

“Because taxpayers are involved, we’re being very vigilant,” said Maria Brewster, who oversees Fannie’s repurchase team. “No taxpayer should have to pay for a business decision that caused a bad loan to be sold to Fannie Mae.”

Read it all from the weekend Wall Street Journal.

Scott Brown has a lot to answer for. His stunning Senate victory for the Republicans in Massachusetts sent the White House into a spin. President Obama promptly decided on the populist gesture of targeting Wall Street with vague proposals to outlaw banks’ risky activities and limit their size. Though seemingly hastily wheeled out, the ideas were first floated a few months ago by Paul Volcker, former chairman of the Federal Reserve Board, a man widely regarded as the best US central banker of the modern era. As a result they have some credibility, though they are far from being a panacea.

Many believe the banks have brought this on their own heads. The return of big bonuses so soon after a crisis of their own making, for which ordinary people will be paying for years, showed crass insensitivity and greed. America’s banks rushed to pay off their obligations to taxpayers under the Tarp (troubled asset relief programme) precisely so that they could get back on the bonus gravy train. The behaviour of the banks, however, is no excuse for flawed policy. Nobody yet knows the detail of Mr Obama’s plans, probably not even the president. But from what we know so far, they suffer from two serious shortcomings.

The first is that they would not have stopped the current crisis….

Read the whole thing.

According to e-mails released this month, AIG was asked to limit what the public knew about the Maiden Lane transactions. The payments have been called a “backdoor bailout” by lawmakers because banks, including Goldman Sachs Group Inc. and Societe Generale SA, were reimbursed at 100 cents on the dollar for mortgage-linked securities that had declined in value.

“This has been terribly mishandled,” said James D. Cox, a professor of corporate and securities law at Duke University School of Law. “There’s this pattern that emerges that the New York Fed, for a variety of reasons including not causing nervousness about who was an AIG counterparty, covered up its rather heavy-handed approach to the bailout.”

Absolutely sickening–read it all.

A professor at Columbia University, Mr. Stiglitz uses his experience teaching to give the lay reader a lucid account of how overleveraged banks, a shoddy mortgage industry, predatory lending and unregulated trading contributed to the meltdown, and how, in his opinion, ill-conceived rescue efforts may have halted the freefall but have failed to grapple with more fundamental problems.

He is eloquent on how the American economy was sustained before the crisis by “a debt-financed consumption binge supported by a housing bubble” and impassioned in describing what he sees as the government’s failure to make substantial reforms to the economic system: though “excesses of leverage will be curbed,” he writes, “the too-big-to-fail banks will be allowed to continue much as before, over-the-counter derivatives that cost taxpayers so much will continue almost unabated, and finance executives will continue to receive outsized bonuses.” In each case, he writes, “something cosmetic will be done, but it will fall far short of what is needed.”

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The effect of free money is remarkable. A year ago investors were panicking and there was talk of another Depression. Now the MSCI world index of global share prices is more than 70% higher than its low in March 2009. That’s largely thanks to interest rates of 1% or less in America, Japan, Britain and the euro zone, which have persuaded investors to take their money out of cash and to buy risky assets.

For all the panic last year, asset values never quite reached the lows that marked other bear-market bottoms, and now the rally has made several markets look pricey again. In the American housing market, where the crisis started, homes are priced at around fair value on the basis of rental yields, but they are overvalued by almost 30% in Britain and by 50% in Australia, Hong Kong and Spain.

Stockmarkets are still shy of their record peaks in most countries. The American market is around 25% below the level it reached in 2007. But it is still nearly 50% overvalued on the best long-term measure, which adjusts profits to allow for the economic cycle, and is on a par with two of the four great valuation peaks in the 20th century, in 1901 and 1966.

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The Federal Reserve Bank of New York, then led by Timothy Geithner, told American International Group Inc. to withhold details from the public about the bailed-out insurer’s payments to banks during the depths of the financial crisis, e-mails between the company and its regulator show.

AIG said in a draft of a regulatory filing that the insurer paid banks, which included Goldman Sachs Group Inc. and Societe Generale SA, 100 cents on the dollar for credit-default swaps they bought from the firm. The New York Fed crossed out the reference, according to the e-mails, and AIG excluded the language when the filing was made public on Dec. 24, 2008. The e-mails were obtained by Representative Darrell Issa, ranking member of the House Oversight and Government Reform Committee.

The New York Fed took over negotiations between AIG and the banks in November 2008 as losses on the swaps, which were contracts tied to subprime home loans, threatened to swamp the insurer weeks after its taxpayer-funded rescue. The regulator decided that Goldman Sachs and more than a dozen banks would be fully repaid for $62.1 billion of the swaps, prompting lawmakers to call the AIG rescue a “backdoor bailout” of financial firms.

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Happy New Year, readers, but before we get on with the debates of 2010, there’s still some ugly 2009 business to report: To wit, the Treasury’s Christmas Eve taxpayer massacre lifting the $400 billion cap on potential losses for Fannie Mae and Freddie Mac as well as the limits on what the failed companies can borrow.

The Treasury is hoping no one notices, and no wonder. Taxpayers are continuing to buy senior preferred stock in the two firms to cover their growing losses””a combined $111 billion so far. When Treasury first bailed them out in September 2008, Congress put a $200 billion limit ($100 billion each) on federal assistance. Last year, the Treasury raised the potential commitment to $400 billion. Now the limit on taxpayer exposure is, well, who knows?

The firms have made clear that they may only be able to pay the preferred dividends they owe taxpayers by borrowing still more money . . . from taxpayers. Said Fannie Mae in its most recent quarterly report: “We expect that, for the foreseeable future, the earnings of the company, if any, will not be sufficient to pay the dividends on the senior preferred stock. As a result, future dividend payments will be effectively funded from equity drawn from the Treasury.”

The loss cap is being lifted because the government has directed both companies to pursue money-losing strategies by modifying mortgages to prevent foreclosures.

Read it all and there is more from John Huffman here.

The second important lesson involves understanding why markets often do not work the way they are meant to. There are many reasons for market failures. In this case, too-big-to-fail financial institutions had perverse incentives: if they gambled and succeeded, they walked off with the profits; if they lost, the taxpayer would pay. Moreover, when information is imperfect, markets often do not work well – and information imperfections are central in finance. Externalities are pervasive: the failure of one bank imposed costs on others, and failures in the financial system imposed costs on taxpayers and workers all over the world.

The third lesson is that Keynesian policies do work. Countries, like Australia, that implemented large, well-designed stimulus programs early emerged from the crisis faster. Other countries succumbed to the old orthodoxy pushed by the financial wizards who got us into this mess in the first place.

Whenever an economy goes into recession, deficits appear, as tax revenues fall faster than expenditures. The old orthodoxy held that one had to cut the deficit – raise taxes or cut expenditures – to “restore confidence.” But those policies almost always reduced aggregate demand, pushed the economy into a deeper slump, and further undermined confidence – most recently when the International Monetary Fund insisted on them in East Asia in the 1990’s.

The fourth lesson is that there is more to monetary policy than just fighting inflation….

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The last two quarters were even more extreme: Productivity in the nonfarm business sector grew at a shocking 8.1% annual rate. There are two possible explanations. One: The last two quarters were among the most technologically innovative and entrepreneurial in the history of the United States. Two: Fearful businesses pared payrolls to the bone. If the second is closer to the truth, payrolls are extraordinarily lean right now. Which means that firms will need to hire more workers as their sales and production grow. Which means that employment may start growing sooner than the pessimists think.

I have been pointing this out for months, but until the last employment report, it was a hypothesis supported by no evidence. Not anymore. While payrolls continued to decline in November, it was by only a scant 11,000 jobs; and the job counts for September and October were revised upward. The data now show a clear trend that suggests that net job creation may be only a month or two away. We’ll see.

There is more to the case for optimism. For one thing, less than 30% of February’s $787 billion fiscal stimulus has been spent to date; over 70% is still in the pipeline. Pessimists dote on the fact that the rate of increase of stimulus spending has probably peaked and will be lower in 2010. True. But the level of GDP will continue to get support from fiscal policy, and a second job-creation package (“Please don’t call it a stimulus!”) looks to be in the works.

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White House budget director Peter Orszag has his hands full these days trying to wrangle down a deficit that has ballooned to an estimated $1.4 trillion. Part of that borrowing was necessitated by the recession, while part of it was designed to shorten the economic crisis.

Orszag says the federal deficit needs to be cut to about 3 percent of economic growth in the coming years to reduce the sea of debt. At the same time, the U.S. has to guard against sending the economy into a tailspin by pulling back too soon on stimulus programs.

Striking a balance is “extraordinarily challenging,” Orszag tells NPR’s Steve Inskeep….

Orszag makes no apologies for not projecting a balanced budget anytime in the near-term: “You have to remember the situation that we inherited.”

Read it all.

Yet the urgent problem now isn’t TBTF [too big to fail], or even banker bonuses. These are distractions. The urgent problem is the giant riverboat gamble that Washington can save the economy by doing what comes naturally””spending money carelessly, creating massive new entitlements without funding them, dishing out cheap credit to politically favored sectors, telling business people where and how to invest.

Mr. Feinberg is an apt symbol indeed, for this gamble is built on the conceit that Washington can hector the recipients, whether auto companies, banks or homeowners, into behaving in ways that are “responsible.” So far, however, human nature is proving a disappointment: Take the outbreak of tax fraud related to the government’s emergency home-buyer’s credit.

Nor is the larger gamble looking so good either. Banks continue to fail at an alarming rate, the dollar is under assault, and Washington is looking at a future of trillion-dollar deficits. One might have guessed it would take a decade of Obamanomics to produce European welfare state levels of youth unemployment, but at 18.5% we’re there.

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The United States economy is now out of the emergency room and appears to be on a slow path to recovery. But enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects. For now, most of those effects are invisible and could indeed remain latent for a long time. Still, their threat may be as ominous as that posed by the financial crisis itself.

To understand this threat, we need to look at where we stand historically. If we leave aside the war-impacted years of 1942 to 1946, the largest annual deficit the United States has incurred since 1920 was 6 percent of gross domestic product. This fiscal year, though, the deficit will rise to about 13 percent of G.D.P., more than twice the non-wartime record. In dollars, that equates to a staggering $1.8 trillion. Fiscally, we are in uncharted territory.

Because of this gigantic deficit, our country’s “net debt” (that is, the amount held publicly) is mushrooming. During this fiscal year, it will increase more than one percentage point per month, climbing to about 56 percent of G.D.P. from 41 percent. Admittedly, other countries, like Japan and Italy, have far higher ratios and no one can know the precise level of net debt to G.D.P. at which the United States will lose its reputation for financial integrity. But a few more years like this one and we will find out.

An increase in federal debt can be financed in three ways: borrowing from foreigners, borrowing from our own citizens or, through a roundabout process, printing money….

Read it all.