“We have not relented on our principles,” Mr. [Jean-Claude] Trichet told Der Spiegel, the German newsmagazine, according to a transcript on the bank’s Web site. “Price stability is our primary mandate and compass.”

And in an interview broadcast on Sunday, the U.S. Treasury secretary, Timothy F. Geithner, signaled his confidence that Europe would resolve its debt crisis and that the American economy would withstand its impact. “Europe has the capacity to manage through this,” Mr. Geithner told Bloomberg Television. “And I think they will.”

As investors absorb the details ”” and the potential weaknesses ”” of the $1 trillion European rescue plan, Mr. Geithner seemed to be trying to draw a sharp, if implicit, contrast to remarks last week from another senior economic adviser to President Barack Obama, Paul A. Volcker. Mr. Volcker, a former Federal Reserve chairman, startled some investors when he spoke of a possible “disintegration” of the euro zone ”” a striking shift from his expressions of confidence of only two months earlier.

Read it all.

Two-year notes sold by the billionaire’s Berkshire Hathaway Inc. in February yield 3.5 basis points less than Treasuries of similar maturity, according to data compiled by Bloomberg. Procter & Gamble Co., Johnson & Johnson and Lowe’s Cos. debt also traded at lower yields in recent weeks, a situation former Lehman Brothers Holdings Inc. chief fixed-income strategist Jack Malvey calls an “exceedingly rare” event in the history of the bond market.

The $2.59 trillion of Treasury Department sales since the start of 2009 have created a glut as the budget deficit swelled to a post-World War II-record 10 percent of the economy and raised concerns whether the U.S. deserves its AAA credit rating. The increased borrowing may also undermine the first-quarter rally in Treasuries as the economy improves.

“It’s a slap upside the head of the government,” said Mitchell Stapley, the chief fixed-income officer in Grand Rapids, Michigan, at Fifth Third Asset Management, which oversees $22 billion. “It could be the moment where hopefully you realize that risk is beginning to creep into your credit profile and the costs associated with that can be pretty scary.”

Read it all.

We need to demand an immediate release of the e-mails, phone records, and meeting notes from the NY Fed and key Lehman principals regarding the NY Fed’s review of Lehman’s solvency. If, as things appear now, Lehman was allowed by the Fed’s inaction to remain in business, when the Fed should have insisted on a wind-down (and the failed Barclay’s said this was not infeasible: even an orderly bankruptcy would have been preferrable, as Harvey Miller, who handled the Lehman BK filing has made clear; a good bank/bad bank structure, with a Fed backstop of the bad bank, would have been an option if the Fed’s justification for inaction was systemic risk), the NY Fed at a minimum helped perpetuate a fraud on investors and counterparties.

This pattern further suggests the Fed, which by its charter is tasked to promote the safety and soundness of the banking system, instead, via its collusion with Lehman management, operated to protect particular actors to the detriment of the public at large.

Read it all.

We need to demand an immediate release of the e-mails, phone records, and meeting notes from the NY Fed and key Lehman principals regarding the NY Fed’s review of Lehman’s solvency. If, as things appear now, Lehman was allowed by the Fed’s inaction to remain in business, when the Fed should have insisted on a wind-down (and the failed Barclay’s said this was not infeasible: even an orderly bankruptcy would have been preferrable, as Harvey Miller, who handled the Lehman BK filing has made clear; a good bank/bad bank structure, with a Fed backstop of the bad bank, would have been an option if the Fed’s justification for inaction was systemic risk), the NY Fed at a minimum helped perpetuate a fraud on investors and counterparties.

This pattern further suggests the Fed, which by its charter is tasked to promote the safety and soundness of the banking system, instead, via its collusion with Lehman management, operated to protect particular actors to the detriment of the public at large.

Read it all.

I understand that positioning for the next election, partisan politics and lobbying money are a deadly combination to any possible reform. But its so obvious to me watching these folks push and shove good ideas away that they: 1) are utterly clueless how all of this (credit crisis, recession, housing bust) happened; b) have absolutely no idea how to fix any of it; iii) are primarily concerned with getting re-elected.

—Barry Ritholtz

1) Immediately vest the FDIC (or other regulator that has a strict consumer-protection mandate) with the authority to take receivership / conservatorship of distressed bank and non-bank financial institutions, including bank holding companies, in the event of insolvency….

2) Require a significant portion of the capital of bank and non-bank financial institutions to be in the form of convertible debt (contingent capital).

Read it all.

AIG and the Federal Reserve Bank of New York have become targets of an investigation into whether the overseer had instructed the troubled insurer not to disclose certain key information to the public.

Neil Barofsky, special inspector general for the $700 billion bailout, is set to tell the House Oversight Committee on Wednesday that he has initiated an investigation into whether the New York Fed instructed AIG (AIG, Fortune 500) not to disclose more than a dozen controversial counterparty transactions to the Securities and Exchange Commission.

Read the whole article.

Washington spent months nursing the financial system back to health after the 2008 economic crisis, stabilizing then reviving battered markets and ultimately restoring trillions of dollars in investor losses. Wall Street’s political fortunes have not fared as well.

Now, an aggressive stance against the bankers, financiers and even government officials popularly blamed for causing the crisis is gaining political momentum, and there are signs it is eroding the very financial stability the government championed.

Read it all.

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.”

Read it all.

Geithner defended the fee against criticism from some bank officials, who say it is about politics and not economics. Those critics note that some institutions that paid back Troubled Asset Relief Program money ”” or never took any ”” will be taxed along with other banks.

“We’re doing what is fair, and what is just, and what is economically sensible and what we have a legal obligation to do, which is to make sure that we hold the American people harmless from the cost of the financial crisis and that we collect back from the financial industry that benefited from the financial rescue the ultimate costs of what it took to solve this crisis,” Geithner says. “That’s the sensible, fair thing to do.”

Geithner says the program was designed to apply to the largest financial institutions that benefited the most from the rescue.

Read or listen to it all.

Sen. Bob Corker (R-Tenn.) ”” a member of the Senate Banking Committee ”” sent a letter to Treasury Secretary Tim Geithner Monday with a list of questions regarding what the Republican called a “blank check” to Fannie Mae and Freddie Mac.

In the letter, Corker criticized the Treasury’s removal of a cap on credit available to the two government-backed firms that were in at the nexus of the mortgage crisis.

“On Dec. 24, 2009, the United States Department of the Treasury announced amendments to the Preferred Stock Purchase Agreements it has with the government-sponsored enterprises Fannie Mae and Freddie Mac. Those amendments removed the $200 billion per enterprise cap ($400 billion total) and, in effect, wrote a blank check for the amount of ‘credit’ that will be made available to the two mortgage giants,” the letter reads.

Read it all.

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.

Read it all.

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.

Read it all.

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.

Unfortunately, growth caused by an inventory bounce is a one-shot affair unless underlying sources of demand, such as consumer spending and long-term investment, pick up.

Which brings us to the still grim fundamentals of the economic situation.

During the good years of the last decade, such as they were, growth was driven by a housing boom and a consumer spending surge. Neither is coming back. There can’t be a new housing boom while the nation is still strewn with vacant houses and apartments left behind by the previous boom, and consumers ”” who are $11 trillion poorer than they were before the housing bust ”” are in no position to return to the buy-now-save-never habits of yore.

What’s left? A boom in business investment would be really helpful right now. But it’s hard to see where such a boom would come from: industry is awash in excess capacity, and commercial rents are plunging in the face of a huge oversupply of office space.

Can exports come to the rescue? For a while, a falling U.S. trade deficit helped cushion the economic slump. But the deficit is widening again, in part because China and other surplus countries are refusing to let their currencies adjust.

Read it all.

Geithner said some of the signs that confidence is returning in the fourth quarter include consumers spending more, businesses investing again, stronger exports and a more stable housing market.

“These things all help ”” they all make a big difference,” Geithner said. “But we were in a very deep hole, and it’s going to take a long time to repair the damage done to confidence.”

Geithner said it’s important that the administration continue to work with Congress to pass financial reform legislation that can “prevent the next crisis” and build a “more stable financial system.”

“But right now, the real risk we face is that banks are not lending enough and not going to provide the capital businesses need to grow for the economy to strengthen going forward,” he said.

Read or listen to it all.

Major procedural reforms will be needed as well. One essential step is the implementation of “pay-as-you-go” rules, which require that all increases in spending or tax cuts be financed by savings elsewhere in the budget. The statutory creation of a “fiscal future commission”””modeled on the Defense Base Closure and Realignment Commission, a federal body whose recommendations are subject to an up-or-down vote in Congress””could represent a major breakthrough. It might even be time to reconsider passing a balanced-budget amendment to the US Constitution, a provision that exists in nearly all US states and is now being pursued in a somewhat analogous form by the European Union. Whatever the specific policy approach, the underlying objective should be to create a system that will achieve a balanced budget over the course of the economic cycle.

A responsible fiscal policy would permit the Federal Reserve to run a relatively easy monetary policy, which would hold down interest rates and prevent overvaluation of the dollar. If the Obama administration is looking for a historical model, it should aim to replicate the Clinton-Greenspan policy of the late 1990s (a mix of budget surpluses and low interest rates) rather than the Reagan-Volcker policy of the early 1980s (a mix of large deficits and high interest rates).

Read it all.

Treasury Secretary Timothy Geithner said any tax on financial transactions would have to be designed to ensure taxpayers don’t ultimately bear the burden, criteria he said no current plan meets.

“I have not seen the version of that that I think works,” Geithner said in an interview on Bloomberg Television’s “Political Capital with Al Hunt,” airing this weekend. “Otherwise people would have done this a long time ago.”

Read it all.

In an interview on the FOX Business Network, Geithner said the U.S. government stands to profit from many of the rescue deals made to big banks a year ago at the height of the financial crisis.

Later in the interview, Geithner told Liz Claman he does not support a tax on stock trades.

On a transaction tax proposal that has been kicked around in Congress as a way to generate much-needed revenue, Geithner said, “I don’t think that specific thing is the way to go.”

Asked about the recent decline in the value of the dollar against other global currencies, Geithner declined to point to a specific value at which point the Treasury Department might grow concerned.

Read it all and the full video of the interview is there.

The animus towards the Fed is striking, considering that its unprecedented market interventions almost certainly averted a financial meltdown last year and a far more severe recession. But many congressmen care less about the disaster avoided than the injustice of bailed-out bankers taking home record bonuses as unemployment keeps rising. The Fed is now guilty by association, seen as too close to banks, too quick to bail them out and too generous and secretive when it does so. The Fed’s structure supplies fodder for this critique. The compromise that led to its creation in 1913 split responsibility for monetary policy between politically-appointed governors in Washington, dc, and the presidents of 12 regional banks, whose boards are appointed in part by private bankers.

Read it all.

For the investor (the person who risks the capital to create real live self-sustaining jobs), every investment, whether it results in a profit or not, would be taxed two more times.

What is near certainty is that this bill will succeed at driving traders to international markets that are escaping the stilted centralized economy that DeFazio and Perlmutter feel the need to champion.

It’s a given that this misguided vengeance against Wall Street is comfort food for populist legislators, but “Wall Street” isn’t stocked exclusively with revolting would-be criminals. It is made up of retirees, small-business owners, entrepreneurs and parents who invest in their kids’ college funds. At last count, nearly 50 percent of Americans are, on some level, invested in the stock market.

If one was a hopeless skeptic, he might believe these legislators were trying to undermine private sector growth by re-appropriating wealth in such a ham-handed way. Even reliable liberal Sen.Chuck Schumer said that a Wall Street transaction tax had the potential to “harm economic recovery efforts by deterring capital investment.”

Read it all.

The White House is lukewarm about proposals by congressional Democrats to introduce broad legislation to create jobs, instead favoring targeted measures that would be less likely to inflate the deficit, administration officials said.

There is as yet no agreement within the White House or in Congress on how to try to curb the U.S. jobless rate. But the differences in opinion suggest that rifts could emerge among Democrats as they wrestle with how to beat back the highest unemployment rate in a generation.

The jobless rate, which hit 10.2% in October, has continued to climb despite the implementation of a $787 billion stimulus package in February.

The subheader for the article is: White House Is Unenthusiastic on Legislation That Would Raise Government Debt. To which I respond–good for them. Read it all.

Watch it all–those of us in parish ministry need to be sensitive to these dynamics and to seek to allow these sentiments to be channeled in constructive and creative ways–KSH.

House Speaker Nancy Pelosi on Thursday played down the possibility of using a stock trade tax to fund jobs legislation, saying it should only be done in conjunction with other countries.

“It would have to be an international rule,” Pelosi (D-Calif.) said at her weekly news conference. She said that she did not want to see trading action move to other countries to avoid such a tax.

She noted, “Other nations have proposed this, and we have been the ones who resisted.” But global consensus would be difficult, if not impossible, to reach by Dec. 18, when House leaders want to finish their job-creation bill.

Read it all.

In the department of bad ideas that won’t go away, Exhibit A is a global tax on financial transactions. British Prime Minister Gordon Brown mooted the tax last weekend before the G-20 finance ministers in St. Andrews, Scotland, where he was promptly rebuffed by Treasury Secretary Timothy Geithner. “That’s not something we’re prepared to support,” Mr. Geithner said.

But it’s easy to see why high-tax countries such as France and Germany relish the idea. Tax competition is a bête noire for the Western European countries whose governments eat up close to half of their economies. The U.K. is back in that club after the post-financial-panic recession lopped 6% off its GDP. Scrambling for revenue””and unwilling to hamstring London markets alone””Mr. Brown is suddenly promoting global tax coordination.

Read it all. I didnt like this editorial because the argument isn’t nearly strong enough. The two key points are not made

It is amazing to me that (2) is hardly ever discussed–KSH.

The fiscal 2009 budget deficit, triple that of 2008, was 10 percent of GDP. Lawrence Lindsey says probable policies will produce deficits of 7 percent of GDP for a decade. Ronald Reagan’s worst deficit was 6 percent of GDP and for only one year.

Lindsey — a former member of the Federal Reserve board of governors and director of George W. Bush’s National Economic Council (2001-02) — says Americans’ net worth has dropped at least $13 trillion since the recession began in December 2007. What is to be done?
Americans could suddenly begin saving substantially more, but this would deepen and prolong the recession. Alternatively, America could reflate the value of its assets by printing money. Lindsey says it is already doing that — printing bonds promiscuously and lending money to banks at negligible rates, money that banks can use to buy the bonds. This sharply increases the money supply, which sets the stage either for inflation — too much money chasing too few goods — or for recovery-snuffing higher interest rates to try to prevent inflation. Or for something like Japan’s lost decade — banks pouring money into government bonds rather than the real economy.

America, says Lindsey, will not be Weimar Germany, where hyperinflation caused people to rush to stores with satchels of rapidly depreciating currency. But, he adds, no country has successfully behaved the way the United States is behaving.

Read it all (emphasis mine).

Prime Minister Gordon Brown is pedaling smartly back on his proposal for a financial transactions tax or ‘Tobin Tax’ after his surprise presentation, delivered at a Group of 20 finance meeting in Scotland, was met with a chorus of criticism over the weekend.

It is believed that Brown’s handling of the issue provoked renewed dispute with the Treasury. Chancellor Alistair Darling is said to be frustrated by the prime minister’s promotion of a plan he already knew would be publicly shot down by the US.

The American rejection of the proposal – “A day-by-day financial transactions tax is not something we are prepared to support,” said US Treasury Secretary Tim Geithner (above, with Alistair Darling) – was followed by rejections from Canada, Russia, the International Monetary Fund and the European Central Bank.

Read it all.

The United States and Britain voiced disagreement Saturday over a proposal that would impose a new tax on financial transactions to support future bank rescues.

Prime Minister Gordon Brown of Britain, leading a meeting here of finance ministers from the Group of 20 rich and developing countries, said such a tax on banks should be considered as a way to take the burden off taxpayers during periods of financial crisis. His comments pre-empted the International Monetary Fund, which is set to present a range of options next spring to ensure financial stability.

But the proposal was met with little enthusiasm by the United States Treasury secretary, Timothy F. Geithner, who told Sky News in an interview that he would not support a tax on everyday financial transactions.

What a disappointment Gorden Brown is turning out to be. This is a very bad idea that he has come out behind, and his timing could not be worse. Fortunately, even the Russian finance minister spoke against it. In any event, read it all–KSH.