Unemployment Up in April
Labor Dept. reports this AM: ” Nonfarm payroll employment continued to decline in April (-539,000), and the unemployment rate rose from 8.5 to 8.9 percent … Since the recession began in December 2007, 5.7 million jobs have been lost. In April, job losses were large and widespread across nearly all major private-sector industries. Overall, private-sector employment fell by 611,000 … the number of persons working part time for economic reasons (sometimes referred to as involuntary part-time workers) was essentially unchanged at 8.9 million; however, the number of such workers has risen by 3.7 million over the past 12 months.”
The Muddle Through Strategy
Stress test results formally released. NYT: “After subjecting the nation’s biggest banks to the most public scrutiny in decades, federal regulators ordered 10 of them on Thursday to raise a total of $75 billion in extra capital and gave the rest a clean bill of health. The long-awaited results of the “stress tests” set off an immediate scramble by major institutions for more capital. By June 8, they must give regulators their plans for raising the money, and raise it by November.”
W. Post looks at how banks negotiated the results.
FT gives Treasury rebuttal to critics: “…some senior officials concede that if all the stress tests achieved was to swap $75bn of one form of tier-one capital for another they would not be transformative. But they say the tests should accomplish much more than this. Tim Geithner, the treasury secretary, said many banks would choose to meet their targets by selling new shares rather than simply converting preferred stock held by the government and others – a process that would increase overall tier-one capital as well as equity.”
Bloomberg on Geithner’s strategy of supporting the banks: ” Treasury Secretary Timothy Geithner is betting that U.S. banks can do something their Japanese counterparts were unable to accomplish in that country’s ‘lost decade’ of the 1990s: earn their way out of trouble … If he’s wrong about the banks’ ability to weather the worst recession in at least half a century, the U.S. may just be postponing the day of reckoning when institutions will have to be shut down and taken over by the government.”
NYT’s Paul Krugman: “What we’re really seeing here is a decision on the part of President Obama and his officials to muddle through the financial crisis, hoping that the banks can earn their way back to health. It’s a strategy that might work. After all, right now the banks are lending at high interest rates, while paying virtually no interest on their (government-insured) deposits. Given enough time, the banks could be flush again … It’s not at all clear that credit from the Fed, Fannie and Freddie can fully substitute for a healthy banking system. If it can’t, the muddle-through strategy will turn out to be a recipe for a prolonged, Japanese-style era of high unemployment and weak growth.”
The Nation’s William Greider cites starker private stress test: “While Obama’s technocrats captured the big headlines with their encouraging ‘stress test’ results, a private firm produced its own ‘stress test’ on the very same day and it told an opposite story. The Institutional Risk Analytics Bank Monitor produces quarterly reports for investors on the health of individual banks and the system as a whole. IRA has gained enormous prestige in financial markets during the last few years because it has consistently been far ahead of government regulators and economists in warning about big trouble ahead. Contrary to the government’s claims, IRA’s analysis is not brightening. IRA crunches the internal numbers that all banks report to the FDIC. It finds ‘a dramatic climb in the stress in the US banking industry.’ More and more financial institutions, large and small, are losing stability or capital cushions as net incomes turned turned negative for 1,575 of them. IRA’s Bank Stress Index jumped from 1.8 at the end of 2008 to 5.57 in the first quarter of 2009.”
Dean Baker praises transparency, but doesn’t like what he sees: “…are the stress tests worthless? They did provide a much clearer picture of the position of individual banks than we had previously. It is worth noting that this is a 180 degree shift from the original course pursued by Treasury Secretary Henry Paulson … Treasury also should be credited for disclosing many of the specifics of the stress tests so it is possible to do a quick (or more in depth) analysis of its assumptions and explore the implications of alternative assumptions. Still, it is hard not to conclude that these stress tests and certainly the PR campaign around them, were intended to paint as positive a picture as possible of the banks’ financial condition. If this picture proves to be wrong, then it means that we will have unnecessarily delayed the clean-up of the financial system.”
New Deal 2.0′s Charlie Ledley on stress test weakness: “The stress tests depend critically upon the valuation of so-called toxic securities. My strong suspicion is the major difference in assumptions between market values (and estimates by economists) and banks’ mark-to-model values derive from the assumption in the banks’ credit models that people who can afford to pay their mortgages will not walk away from their homes even if they are 25-50% underwater (especially in states like California where they can walk without declaring bankruptcy). I suspect those assumptions were not challenged in the stress tests. This could show up in two places in the results: (i) significantly understated loan loss reserves for held to maturity mortgages and (ii) overvalued mortgage securities. Resolution of this will be impeded by recent changes that watered down mark to market accounting rules.”
The Stash’s Noam Scheiber finds stress test numbers “defensible”: “the numbers look pretty similar to some recent IMF numbers that are widely viewed as credible. The IMF expects the entire U.S. banking system to lose about $620 billion this year and next year; it puts the cumulative losses from 2007 (the beginning of the housing bust) to 2010 at $1.2 trillion. For its part, the stress-test scenario anticipated about $600 billion in losses for the 19 banks this year and next year, and $950 billion in cumulative losses between mid-2007 and 2010. (When you further consider that the 19 stress-test subjects represent about two-thirds of the U.S. banking system, the government’s numbers are actually more pessmistic than the IMF’s.) ”
Climate Deal Close?
E&E News PM reports Waxman may be close to a deal: “House Energy and Commerce Chairman Henry Waxman (D-Calif.) plans to release a new draft of global warming and energy legislation next week ahead of a markup — most likely in the full committee — before the Memorial Day recess. ‘We’re moving well, making a lot of progress on these issues,’ Waxman said [Thursday]. ‘We’re getting very, very close.’”
WH stays engaged. Bloomberg: “President Barack Obama’s climate ‘czar,’ Carol Browner, will meet with executives from companies such as Duke Energy Corp. who are seeking business- friendly rules to cap global warming pollution, officials said. Representatives from the U.S. Climate Action Partnership, or USCAP, a coalition of companies including Duke and General Electric Co., will meet with Browner at the White House today to talk about a proposed bill in Congress to create a market for trading permits to release carbon dioxide emissions, people familiar with the matter said.”
Ezra Klein praises Baucus for pressing carbon cap in Senate hearing: “‘Action would not be without cost,’ he admits. ‘But the costs of inaction would be far greater.’ That’s really the key insight. No one advocates a cap and trade program or a carbon tax because it seems like fun. No politician pushes these proposals because they’re a surefire ticket to reelection. It’s simply that if we don’t do something, the consequences could prove disastrous.”
NYT editorial board urges climate bill compromise, with well-meaning but meaningless advice: “Though flawed, the bill is an honorable start on a problem too long neglected. Fix it, but get on with it…”
Health Care Update
The Hill finds right-leaning Dems looking to influence health care debate: “In the House, the New Democrat Coalition issued a statement of principles on health reform that emphasizes strengthening the private insurance market for employees of large and small businesses and for individuals … The New Democrats are silent on [creating a public plan option], whereas [Sen. Ben] Nelson showed significantly less flexibility on the public plan issue and previously had indicated that he would have difficulty supporting any healthcare bill that included it.”
NYT on proposal to tax employer benefits to fund reform: “It is an alluring way to pay for the ambitious plan to expand health coverage to the nearly 50 million people who are now uninsured. Simply put, the government would tax the people who already have the most expensive health benefits, as provided by their employers. By one Congressional estimate, taxing this ‘Cadillac coverage,’ as some call it, could yield $100 billion in revenue over five years … If the plan is not designed carefully, [critics] say, the additional taxes could affect many workers who are far from affluent and put the cost of adequate coverage further beyond the reach of many Americans … Union officials, for example, say that the proposed policy could translate into higher taxes for some of its members, many of whose contracts call for generous health benefits.”
The Treatment’s Jonathan Cohn is disappointed Rangel is opposing the benefits tax idea.
Obama Releases Budget Details
AP on energy component: “President Barack Obama outlined a budget plan Thursday that would end $26 billion in oil and gas industry tax breaks, point to a new direction for dealing with nuclear waste and shift government aggressively toward helping to develop renewable energy sources.”
Congress complains about Obama budget cuts, AND cuts are not enough. LA Times: “Skeptics have criticized Obama’s proposed cuts as meager, as the 121 programs he wants to trim or eliminate would save $17 billion — or one-half of 1% of the budget … many of the cuts are unlikely to happen at all, because of deals already struck in Congress and intense opposition from lawmakers.”