Rick Santelli’s rant on CNBC Thursday morning really did go viral all through the day, so I suppose I shouldn’t have been surprised to see it open the news–but I was. Watch it all.

The holding companies seem to have invested most of their TARP money in their other businesses or else retained the option to do so by keeping it in deposit accounts, even as the capital of their banks decreased. At the same time the banks, which provide the majority of loans to large corporate borrowers, drastically reduced lending to new borrowers.

It’s easy to see why holding companies would withhold capital from their troubled banks. If a bank is insolvent – as many are now believed to be – and the government has to take it over, the holding company loses any capital it gave to the bank. Rather than take that risk, the holding company can opt to spend its money elsewhere, perhaps on trading of its own.

But this is not a good use of scarce capital. We might end up with too much of this proprietary trading and too little lending. It also means that when it comes time to recapitalize banks there is a bigger hole to fill, and when banks fail there is less capital available to meet the government’s obligations to insured depositors and other creditors.

Keeping money at the holding company may benefit its shareholders, but it is costly for taxpayers.

Bailouts, at the very least, should reach their target.

Read it all.

For homeowners there are two key paragraphs: first the lender is responsible for bringing the mortgage payment (sounds like P&I) down to 38% of the borrowers monthly gross income. Then the lender and the government will share the burden of bringing the payment down to 31% of the monthly income. Also the homeowner will receive a $1,000 principal reduction each year for five years if they make their payments on time.

This is not so good. The Obama administration doesn’t understand that there were two types of speculators during the housing bubble: flippers (they are excluded), and buyers who used excessive leverage hoping for further price appreciation. Back in April 2005 I wrote: Housing: Speculation is the Key

[S]omething akin to speculation is more widespread ”“ homeowners using substantial leverage with escalating financing such as ARMs or interest only loans.

This plan rewards those homebuyers who speculated with excessive leverage. I think this is a mistake.

Another problem with Part 2 is that this lowers the interest rate for borrowers far underwater, but other than the $1,000 per year principal reduction and normal amortization, there is no reduction in the principal. This probably leaves the homeowner far underwater (owing more than their home is worth). When these homeowners eventually try to sell, they will probably still face foreclosure – prolonging the housing slump. These are really not homeowners, they are debtowners / renters.

Read it carefully and read it all.

Read it all.

President Barack Obama signed his $787 billion recovery package into law on Tuesday with a statement that it would “set our economy on a firmer foundation.” His press secretary, Robert Gibbs, said Obama has not ruled out a second stimulus package.

The president said he would not pretend “that today marks the end of our economic problems.”

“Nor does it constitute all of what we have to do to turn our economy around,” Obama said at the signing ceremony in the Denver Museum of Nature and Science. “But today does mark the beginning of the end, the beginning of what we need to do to create jobs for Americans scrambling in the way of playoffs.”

Read the whole article.

The administration stepped back over the weekend from naming a “car czar,” as it had planned, to oversee the restructuring. But according to people familiar with the task force, it named former Lazard Freres & Co. investment banker Ron Bloom a key adviser. Mr. Bloom, who made a name advising U.S. steelworkers to accept major concessions in several bankruptcy cases, is expected to take the task force’s lead role, a senior U.S. Treasury official says.

People who know Mr. Bloom expect him to be tough on the auto makers, the United Auto Workers and other parties involved in their restructuring.

“The management of the Big Three are probably not going to like what Ron Bloom has to say; the UAW is not going to like what Ron Bloom has to say; and certainly the stockholders and creditors will not like what he has to say,” said Michael Psaros, a co-founder of private-equity group KPS Capital Partners, who has worked with Mr. Bloom in and out of bankruptcy courts. He adds that Mr. Bloom has “repeatedly shown an ability to transform struggling companies into profitable going concerns.”

Read it all from the front page of today’s Wall Street Journal. Note especially the section on “dentist-chair bargaining;” it sounds very painful to me.

It seems like politicians for months have been throwing around numbers in the billions and saying that unless the government acts right now everything will get worse. What is going on?

The economic system was hit was a flurry of crises at roughly the same time, and there isn’t a single solution to all of the problems, even though they are connected.

What is the housing crisis?

Both political parties have supported the idea that individuals should own their own homes. But in pursuing that goal, some financial institutions lent money to people who could not afford the long-term commitment, which often included rising interest rates after an initial period of low payments. Critics complain that a variety of financing vehicles snared people into impossible situations, especially as prices of homes fell and the monthly mortgage payment rose.

Read it all.

The criminal part of this boondoggle is divided into two parts. The first is the Democrats promised to post the bill a full 48 hours before the vote was taken to allow members of the public to see what they were getting for their money. Both parties voted unanimously to do this … and they lied.

It didn’t happen. Why am I not surprised? Congress lying to the American people has become part of their job description. They can’t be trusted on anything anymore.

I’m sure part of the reason there was no time for the public to read the bill was the 11th-hour internecine warfare between House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid.

Read it all.

Reality check: The “stimulus” that President Obama will sign Monday is a band-aid. If Irving Fisher, who by some accounts was our finest American economist, was right, such a stimulus is useful in that it helps those who are unemployed and replaces some lost consumer spending; but the real work that must be done is to get the credit system flowing again. I don’t have the space to go into that economic debate tonight, but it is at the core of the problem. It is Keynes vs. Fisher, von Mises vs. Friedman. It is, as Lacy Hunt says, “The Grand Experiment.” After 70 years, we are going to see who is right. My money is on Fisher. It is not an experiment that is going to be fun to live through; but when we have the next debt deflation in 70 years or so, our grandchildren may know what to do.

We will see another stimulus package, probably by the end of the year. This time it will hopefully provide real stimulus. Much of the current version is simply an increase in federal spending that will be hard to rein in. And please, I am not being partisan. That is the analysis of many of Obama’s advisors. And it goes back to the debate I mentioned. Keynes would argue that it is in fact stimulus. The other three economists would have differing views. And like I said, in a few years we are going to know who was right.

But the heavy lifting is going to be done by the Fed. Watch their balance sheet expand. And watch Treasury and the FDIC come back and ask for massive amounts of money to take over very large insolvent banks. Stay tuned.

Take the time to read it all.

It will take more than one “car czar” to help get the embattled U.S. auto industry back on track, President Barack Obama has decided. Instead, his administration is establishing a presidential task force to direct the restructuring of General Motors Corp. (GM) and Chrysler LLC, a senior administration official said Sunday night.

Treasury Secretary Timothy Geithner and National Economic Council Director Lawrence Summers will oversee the across-the-government panel, the official said, speaking on the condition of anonymity because no announcement has been made.

GM and Chrysler are expected to submit restructuring plans to the government by Tuesday, the deadline for showing how they can repay billions in loans and become viable in spite of a huge drop in auto sales.

The auto industry task force is just one element of Obama’s plan to revive the flailing economy. On Tuesday he’s flying to Denver to sign the $787 billion stimulus bill into law, taking his economic message to the American people, who are giving him high marks for handling the crisis.

Read it all.

Seven score and four years ago, Abraham Lincoln stood on the steps of the U.S. Capitol and said North and South alike must suffer for the sin of slavery.

“If God wills that (the war) continue until … every drop of blood drawn with the lash shall be paid by another drawn with the sword, so it still must be said ‘the judgments of the Lord are true and righteous altogether,'” Lincoln said in his second inaugural address, quoting the Psalms.

Called “Lincoln’s Sermon on the Mount,” his 1865 address has been deemed the most religiously sophisticated presidential speech in American history. It was delivered by a backwoods lawyer with just one year of formal schooling who never joined a church.

With the 200th anniversary of Lincoln’s birth just past (Feb. 12), the 16th president and his unconventional faith continue to inspire and to confound. Churches, community centers and colleges across the country are celebrating the bicentennial by pondering the Great Emancipator’s words and mounting exhibits exploring his dealings with various faiths.

Read it all.

There was a chance that this week would mark a turning-point in an ever-deepening global slump, as Barack Obama produced the two main parts of his rescue plan. The first, and most argued-over, was a big fiscal boost. After a lot of bickering in Congress a final compromise stimulus bill, worth $789 billion, seemed to have been agreed on February 11th; it should be only days away from becoming law. The second, and more important, part of the rescue was team Obama’s scheme for fixing the financial mess, laid out in a speech on February 10th by Tim Geithner, the treasury secretary.

America cannot rescue the world economy alone. But this double offensive by its biggest economy could potentially have broken the spiral of uncertainty and gloom that is gripping investors, producers and consumers across the globe.

Alas, that opportunity was squandered. Mr Obama ceded control of the stimulus to the fractious congressional Democrats, allowing a plan that should have had broad support from both parties to become a divisive partisan battle. More serious still was Mr Geithner’s financial-rescue blueprint which, though touted as a bold departure from the incrementalism and uncertainty that had plagued the Bush administration’s Wall Street fixes, in fact looked depressingly like his predecessors’ efforts: timid, incomplete and short on detail. Despite talk of trillion-dollar sums, stockmarkets tumbled. Far from boosting confidence, Mr Obama seems at sea.

Read it all.

When Barack Obama was campaigning for president, he promised to enact legislation to prohibit states from limiting the right to abortion. Now that Obama is in the White House and solid Democratic majorities are ensconced in Congress, opponents of abortion rights have been bracing for that and other major changes to abortion laws.

But there are indications that what those groups dread most and what some liberal voters eagerly anticipate as the rewards of victory may not come to pass””at least not yet. Democrats on Capitol Hill say that while they are committed to reversing several Bush administration policies with regard to abortion rights and family planning, they may hold off on pursuing the kind of expansive agenda feared by social conservatives.

Despite gains in the House and Senate in last year’s elections, there are still significant numbers of moderate Democrats””particularly in the House””who either oppose abortion altogether or are not in favor of sweeping changes and favor a more incremental approach. And any large-scale effort involving something as polarizing as abortion necessitates spending political capital, something the Obama White House needs in abundance to ensure the survival of its economic policies.

“We deal in reality,” said Nancy Keenan, president of NARAL Pro-Choice America. “You have to be pragmatic, realistic and, in the end, strategic.”

Read the whole article.

It was the biggest bill of the year, a giant expansion of government spending.

Top members of Congress were incensed that they were cut out of final negotiations between the House and Senate. They complained that the legislation was the product of just one party with only a few select members of the opposition invited to play a role.

But the Medicare drug plan passed anyway in 2003 when Republicans controlled the White House and Congress. So it was hardly novel this week when Republicans protested vigorously that their legislative rights had been violated as the Democratic-led Congress pushed through the $787 billion economic stimulus bill with just three Republican votes in the Senate. Only the party labels had changed.

In truth, regular order ”” as following the Congressional rule book is known on Capitol Hill ”” has not been occurring very regularly in the House and Senate for years. And both parties are to blame.

Read it all.

US President Barack Obama has welcomed Congress’s approval of his $787bn (£548bn) economic stimulus package.

He described it as a “historic step” and “major milestone on our road to recovery”, and is expected to sign the bill into law early next week.

The Senate approved the measure with just three Republican votes, hours after the House of Representatives backed it without Republican support.

Mr Obama has said the plan will “save or create more than 3.5 million jobs”.

Republicans argue the tax cuts are insufficient, and that the economy will be saddled with debt for years to come.

Read it all.

This is really helpful–read it all.

The Obama administration is committing huge sums of money to rescuing banks, but the veterans of Japan’s banking crisis have three words for the Americans: more money, faster.

The Japanese have been here before. They endured a “lost decade” of economic stagnation in the 1990s as their banks labored under crippling debt, and successive governments wasted trillions of yen on half-measures.

Only in 2003 did the government finally take the actions that helped lead to a recovery: forcing major banks to submit to merciless audits and declare bad debts; spending two trillion yen to effectively nationalize a major bank, wiping out its shareholders; and allowing weaker banks to fail.

By then, Tokyo’s main Nikkei stock index had lost almost three-quarters of its value. The country’s public debt had grown to exceed its gross domestic product, and deflation stalked the land. In the end, real estate prices fell for 15 consecutive years.

More alarming? Some students of the Japanese debacle say they see a similar train wreck heading for the United States.

“I thought America had studied Japan’s failures,” said Hirofumi Gomi, a top official at Japan’s Financial Services Agency during the crisis. “Why is it making the same mistakes?”

Read it all.

The U.S. banking system is close to being insolvent, and unless we want to become like Japan in the 1990s — or the United States in the 1930s — the only way to save it is nationalization.

As free-market economists teaching at a business school in the heart of the world’s financial capital, we feel downright blasphemous proposing an all-out government takeover of the banking system. But the U.S. financial system has reached such a dangerous tipping point that little choice remains. And while Treasury Secretary Timothy Geithner’s recent plan to save it has many of the right elements, it’s basically too late.

The subprime mortgage mess alone does not force our hand; the $1.2 trillion it involves is just the beginning of the problem. Another $7 trillion — including commercial real estate loans, consumer credit-card debt and high-yield bonds and leveraged loans — is at risk of losing much of its value. Then there are trillions more in high-grade corporate bonds and loans and jumbo prime mortgages, whose worth will also drop precipitously as the recession deepens and more firms and households default on their loans and mortgages.

Read it all.

President Barack Obama, signaling early in his administration that religion belongs in the public discourse, has promised to open a big tent to voices from across the spectrum of belief without crossing boundaries separating church and state.

The Democrat’s inaugural pomp was steeped in prayer, and one of his first proclamations included a shout out to “an awesome God.” Last week, Obama used the platform of the National Prayer Breakfast to unveil a new-look White House Office on Faith-Based and Neighborhood Partnerships that features a team of policy advisers from both religious and secular social service circles. Most are ideological allies, but not all.

The question is whether such moves will amount to symbolic window dressing or progress finding common ground on moral issues without stepping on traditional culture-war land mines.

Read it all.

Some of the large banks in the United States, according to economists and other finance experts, are like dead men walking.

A sober assessment of the growing mountain of losses from bad bets, measured in today’s marketplace, would overwhelm the value of the banks’ assets, they say. The banks, in their view, are insolvent.

None of the experts’ research focuses on individual banks, and there are certainly exceptions among the 50 largest banks in the country. Nor do consumers and businesses need to fret about their deposits, which are insured by the U.S. government. And even banks that might technically be insolvent can continue operating for a long time, and could recover their financial health when the economy improves.

But without a cure for the problem of bad assets, the credit crisis that is dragging down the economy will linger, as banks cannot resume the ample lending needed to restart the wheels of commerce. The answer, say the economists and experts, is a larger, more direct government role than in the Treasury Department’s plan outlined this week.

Read it all.

Sen. Judd Gregg abruptly withdrew his nomination as commerce secretary Thursday, telling Politico that he “couldn’t be Judd Gregg” and serve in Barack Obama’s Cabinet.

The White House ”” where some aides were caught off guard by the withdrawal ”” initially responded harshly to Gregg’s announcement, portraying the New Hampshire Republican as someone who sought the job and then had a “change of heart.”

In a statement, White House press secretary Robert Gibbs said Gregg had “reached out to the president and offered his name for secretary of commerce” ”” and that he’d promised that, “despite past disagreements about policies, he would support, embrace and move forward with the president’s agenda.”

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Yet even if President Obama gets the stimulus spending just right, the economy could still be sandbagged by a collapsed banking system. Treasury Secretary Timothy Geithner’s plan is far too complex, and too much of a gift to Wall Street. Judging by the initial verdict of Tuesday’s financial markets, the plan might well fall of its own weight.

Geithner’s plan basically tries to paper over the fact that several of America’s biggest banks are insolvent in the absence of taxpayer bailouts. It attempts to restart the same system of excessive loan securitization that caused the crash ”” this time with guarantees or loans by the Treasury or Federal Reserve. Many details have not been released, because the Treasury has not figured out how this can work.

The taxpayers have already effectively bought much of the banking system. It would be far cleaner and more efficient for government to acknowledge that, take over the large banks, clean out their balance sheets, and then sell healthy banks back to private industry.

Read it all.

The White House unveiled a sweeping proposal Tuesday to spend as much as $2 trillion in public and private funds to prop up the nation’s financial system as the Senate narrowly approved an $838 billion stimulus intended to jump-start the failing economy.

Even as President Obama and Congress worked to wrestle their way out of the worst economic crisis since the Great Depression, stock prices plunged on Wall Street. Major indexes skidded by more than 4%, and the Dow Jones industrial average fell 382 points.

“It’s gotten worse,” Obama said in Fort Myers, Fla., the latest stop on a tour around the nation the president hopes will build support for the stimulus. “The situation we face could not be more serious.”

Read it all.

Leave it to a brainy Indian to come up with the cheapest and surest way to stimulate our economy: immigration.

“All you need to do is grant visas to two million Indians, Chinese and Koreans,” said Shekhar Gupta, editor of The Indian Express newspaper. “We will buy up all the subprime homes. We will work 18 hours a day to pay for them. We will immediately improve your savings rate ”” no Indian bank today has more than 2 percent nonperforming loans because not paying your mortgage is considered shameful here. And we will start new companies to create our own jobs and jobs for more Americans.”

While his tongue was slightly in cheek, Gupta and many other Indian business people I spoke to this week were trying to make a point that sometimes non-Americans can make best: “Dear America, please remember how you got to be the wealthiest country in history. It wasn’t through protectionism, or state-owned banks or fearing free trade. No, the formula was very simple: build this really flexible, really open economy, tolerate creative destruction so dead capital is quickly redeployed to better ideas and companies, pour into it the most diverse, smart and energetic immigrants from every corner of the world and then stir and repeat, stir and repeat, stir and repeat, stir and repeat.”

While I think President Obama has been doing his best to keep the worst protectionist impulses in Congress out of his stimulus plan, the U.S. Senate unfortunately voted on Feb. 6 to restrict banks and other financial institutions that receive taxpayer bailout money from hiring high-skilled immigrants on temporary work permits known as H-1B visas.

Read it all.

“I don’t call this a plan; it’s a tease,” said Bert Ely, principal at bank consultant Ely & Co. Ely said that among other things, he was nervous about how the government will handle the sales of assets. “The devil’s in the details, but the details weren’t there.”

—From this morning’s USA Today

The problem is that a significant portion of the very biggest banks are insolvent. And on top of that, most of them have very large capital markets operations which have bean the nexus of credit intermediation. The regulators spent the last decade plus being in studious ignorance of those businesses, at least the complicated ones where all the risk resided. The SEC never was very interested in bonds, and the Fed took a hands-off, “let a thousand flowers bloom” approach to risk management, derivatives and what was called innovation. Author and market observer Martin Mayer warned “a lot of what is called innovative is simply a way to find new technology to do that which was forbidden with the old technology.”

But the history of major banking crises unambiguously shows that insolvent financial institutions need to be resolved. There are variations on the theme: the government can take them over and recapitalize them, clean them up and re-sell them, a la Sweden; you can wipe out equity investors and bondholders; you can try new twists, like various good bank proposals that have surfaced lately (making new entities out of the deposits and good assets and leaving the dreck with the existing bond and shareholders). While there would be many important details to be sorted out, this is not path breaking, except in the scale at which it needs to occur. And now, having had four actute phases of a credit crunch, the Fed and other central banks have plenty of liquidity facilites ready to deal with any initial overreaction. Rest assured, although radical measures would not be pleasant or easy, there are plenty of models and precedents.

But…here we have another scowling Treasury secretary, with a bit more hair than his predecessor, serving up the same fatally flawed approach as before: let’s just throw money at the banks and hope they get better. This is tantamount to using antibiotics to treat gangrene.

Read it all.

Read it all.

Worth the time.

Yesterday’s announcement ducked the central question of how to value the toxic assets. It is an issue that confounded Mr Geithner’s predecessor Hank Paulson, who ditched a plan for the government to buy assets directly, instead focusing on direct capital injections for the banks.

The Treasury said its programme would be “designed with a public-private financing component, which could involve putting public or private capital side-by-side and using public financing to leverage private capital”. The involvement of private-sector money would mean the government was not setting the price, it added. The exact mechanism, though, could take weeks to decide. Joseph Lavorgna, an economist at Deutsche Bank, said: “It is not big enough. There are few details. The administration is trying to buy time and they don’t get the fact that we need to get something yesterday.”

Tony Crescenzi, an analyst at Miller Tabak & Co, said: “It remains extremely uncertain how the Treasury will entice investors to do something they have been avoiding since the start of the crisis.”

The dilemma is that pricing the assets too low could make many big banks insolvent, while pricing them above market value means taxpayers handing a no-strings-attached subsidy to lenders.

Read it all.

The Senate voted on Tuesday to approve an $838 billion economic stimulus plan that stands to become the most expansive anti-recession effort by the United States government since World War II.

Congressional leaders said they would immediately begin to work out the differences between the Senate measure and an $820 billion version passed by the House, with President Obama also likely to have a strong voice in the talks.

The timetable for the House-Senate negotiations remained indefinite, however. Senator Harry Reid of Nevada, the Democratic majority leader, said he and House Speaker Nancy Pelosi “think we can get a lot of work done in the first 24 hours.”

Read it all.