Marketplace Scratch Pad

Morning Reading

Scott Jagow Jul 15, 2009

Congress has suddenly realized the banks might have a problem with toxic assets. Plus, some feisty debates over Goldman Sachs profits and the health care bill. That and more in this edition of Morning Reading:

First up, former hedge fund manager and author of “How We Got Here,” Andy Kessler, writes in the Wall Street Journal that Congress and the Treasury have done almost nothing right so far:

At the end of the day, only one thing has worked — flooding the market with dollars. By buying U.S. Treasuries and mortgages to increase the monetary base by $1 trillion, Fed Chairman Ben Bernanke didn’t put money directly into the stock market but he didn’t have to. With nowhere else to go, except maybe commodities, inflows into the stock market have been on a tear. Stock and bond funds saw net inflows of close to $150 billion since January. The dollars he cranked out didn’t go into the hard economy, but instead into tradable assets. In other words, Ben Bernanke has been the market…

Again, when it’s clear that you are the market you have to stop buying and begin tackling the hard stuff. By not restructuring banks, by not getting bad loans off bank balance sheets, by not standing up to the massive increases in government debt crowding out private capital, the Fed and Treasury are holding back real economic growth.

Speaking of not getting the bad loans off bank balance sheets, Congressmen Barney Frank and Chris Dodd have concluded that banks are holding some loans at “potentially inflated values.”

Seriously. Re-read that sentence.

Bloomberg appropriately asks, you’re saying this now?

Why, after arguing for banks to have more leeway, is Congress now pushing back? Because many government responses to the financial crisis are more about manipulating prices — and behavior — than truly getting markets back on their feet…

Many banks have marked down these loans only by 3 percent to 4 percent, said Paul Miller, bank analyst at Friedman Billings Ramsey & Co. These loans in many cases would likely fetch about 40 cents on the dollar if sold in today’s market.

The losses are “a big part of the toxic asset issues facing banks,” Miller added.

Yes, I believe some people have been saying that for months.

Many commentators are debating the implications of this week’s profit report from Goldman Sachs. Robert Reich says we should be worried:

Goldman’s resurgence should send shivers down the backs of every hardworking American who has lost a large chunk of retirement savings in this economic debacle, as well as the millions who have lost their jobs. Why? Because Goldman’s high-risk business model hasn’t changed one bit from what it was before the implosion of Wall Street. Goldman is still wagering its capital and fueling giant bets with lots of borrowed money. While its rivals have pared back risks, Goldman has increased them.

Nonsense, writes Times of London Business Editor David Wighton:

The vast bulk of the money it is making comes from straightforward stuff such as making markets in commodities — where margins have shot up because competitors have pulled back — or helping companies to raise money from share issues…

But, say the critics, the fact that Goldman Sachs is too big to fail must inevitably encourage it to take excessive risks. If management screws up, the bank will be bailed out. It is extraordinary how prevalent this idea is among financially sophisticated people. If a bank is bailed out, the depositors will be protected and possibly the debt holders. But not the shareholders or the management. They will be no better off than if the bank was allowed to fail.

In case you couldn’t have guessed this, NY Times economist Paul Krugman loves the health care bill:

OK, so the CBO score for the 3-committee House health care plan is in: $1 trillion over the next decade for 97 percent coverage of legal residents.

That’s a bargain: the catastrophe of being ill without insurance, the fear of losing insurance, all ended — for much less than the Bush administration’s useless $1.35 trillion first tax cut, quickly followed by another $350 billion.

On the Marketplace Morning Report, we heard the opposite view of the health care bill:

The reaction from business groups has been swift and sharp. A lobbyist for the National Federation of Independent Business says it “costs too much” and “has way too much government involvement.”

The U.S. Chamber of Commerce is zero’ing in on the tax hikes — almost 5.5 percent for someone earning more than a million dollars. The Chamber says higher income taxes will keep small-business owners from growing their companies and hiring new workers.

The New York Times’ David Leonhardt points out what unemployment rates would be if you included part-time workers who’d rather be working full-time and other people who’ve just thrown in the towel on the job search:

Include them — as the Labor Department does when calculating its broadest measure of the job market — and the rate reached 23.5 percent in Oregon this spring, according to a New York Times analysis of state-by-state data. It was 21.5 percent in both Michigan and Rhode Island and 20.3 percent in California. In Tennessee, Nevada and several other states that have relied heavily on manufacturing or housing, the rate was just under 20 percent this spring and may have since surpassed it.

NPR looked at how California’s prison system is a huge part of its financial problems:

The prison population has grown from 25,000 to 175,000 since the early 1990s, not because of an increase in crime, Sullivan says, but because of the “tough-on-crime, three-strikes-and-you’re-out” laws. But the growing population isn’t the only prison-related challenge facing the state.

Unions are another factor. The prisons employ 33,000 people, including the nation’s highest-paid correctional officers. The unions are a powerful political force, backing ballot measures for longer sentencing and punishment, for example.

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