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The Wonkish Myth of Crowding Out

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Posts in this series

The Deficit Myth By Stephanie Kelton: Introduction And Index
Debunking The Deficit Myth
MMT On Inflation
Reflections On The Deficit Myth
The National Debt Is Soooooo Big

Chapter 4 of Stephanie Kelton’s The Deficit Myth takes up the theory that federal government deficits increase the cost of borrowing by the private sector. Here’s Kelton’s typically incisive description:

In its most common form, the crowding-out myth says that fiscal deficits require government borrowing, which forces Uncle Sam into competition with other would-be borrowers. As everyone competes for a limited supply of available savings, borrowing costs move higher. With interest rates on the rise, certain borrowers — especially private businesses — won’t be able to secure funding for their projects. This causes private investment to fall, leading to a future where there are fewer factories, machines, and so on. With a smaller stock of capital goods, society ends up with a less productive workforce, slower wage growth, and a less prosperous economy. It does sound ominous! P. 101-102.

Given the amount of capital floating around in the world, much of it US dollars, it’s hard to see why this makes sense. The big problem is not the availability of capital for US businesses, but the insistence of the rich that they not be exposed to any risk of loss. What could be a better solution for that than Treasury securities? But the crowding-out theory requires a chain of reasoning, and so it appeals to the self-regard of our wonk class. [1]

Kelton first addresses the idea that there is a limited pool of savings. As she does throughout the book, Kelton uses this myth to discuss the overall picture of money as explained by mainstream economists. They claim that private savings are the ultimate source of the funds that are available to lend. [2] If the government borrows from that limited amount, there is less for others. As you can see, it’s a pinched view of government spending. It seems to mean that government spending is lost somehow, instead of going into businesses and our own pockets, in the US and elsewhere when the government buys from businesses in other countries.

Kelton asks us to consider the flow of dollars in our economy from an accounting perspective. She starts with a two-bucket system: the Federal Government is one bucket, and Everyone Else is the second. Any dollar that leaves the FG bucket goes to the EE bucket. There is no where elso for it to go. Taxes take money out of the EE bucket and put it into the FG bucket. That leads to our first equation:

FG balance + EE balance = 0

So, if there is a FG deficit then there is an EE surplus of like amount.

FG deficit = EE surplus

Deficit spending has a good side! That’s something that seems to elude the practitioners of deficit scare-mongering. On the other hand, if the government runs a surplus, we get

FG surplus = EE deficit.

That seems bad. It means we are losing some of our wealth. Where does that wealth go? Well, it’s cash. Remember that cash is a debt on the government’s books, so the cash it collects in taxes just offsets the debt, and disappears. That might be bad! That’s something else the deficit scare-mongers never mention.

Kelton emphasizes that it’s the net that counts. So, if the FG spends $100 and taxes $90, there is a surplus of $10 in the EE bucket. That’s money in our pockets, increased savings. The federal government can just issue Treasuries in that amount, converting the green dollars into yellow dollars in Kelton’s parlance. So contrary to the myth of crowding out, FG deficits don’t eat up our existing savings, they actually increase the amount of savings. It’s not an opinion, it’s just simple accounting.

At this point we might ask if there was ever any real danger of a shortage of loanable funds. The Fed publishes a weekly summary of the balance sheets of all commercial banks in the US. As of July 1, total loans were $10.6 T and total deposits were $15.6 T. [3]. The Treasury has issued trillions of dollars of securities to cover deficit spending to date and there are still $5 T in available bank credit, and with the multiplier effect [2], there’s much more. There’s plenty more where that came from. Money Market funds have a total of about $4.6 T, all of it short-term, and much of that is available for longer-term investment if there were reasonable returns for the perceived risk. But there aren’t any decent returns to cash right now. Why?

That’s Kelton’s second point. Step 2 in the reasoning chain for this myth is that competition to borrow money drives up interest rates. Not so, says Kelton. She explains that interest rates are a policy choice. The Fed has always been able to control interest rates, both short and long term. In the past, it has done so extensively. During WWII, the Fed kept interest rates at specific levels to help control the economy during the war. That continued until 1951. We have had other bouts of serious control, including immediately after the Great Crash, though that didn’t last long. The Fed is currently keeping interest rates low for both short-and long-term loans.

At other times, the Fed has controlled short-term rates and allowed the private market to affect longer-term rates. Kelton explains how the Fed controls both long- and short-term interest rates, which I’ll skip over. It’s enough to say that this puts the nail in the idea of crowding-out.

Deficits have their good side, but they can create problems, like inflation or politically-driven mis-allocation of resources. MMT doesn’t argue for deficits or surpluses. It argues that we should pay attention to the state of the economy and pick policies that maximize our political desires. I think the government should do more to take care of our citizens. I think everyone should have a job, good schools, decent transportation, clean water and clean air, a planet that isn’t catching fire, and a world not ravaged by Covid-19. MMT supports those goals. Others think we should buy more tanks and guns and do nothing else, just let the market fix things. There are MMT prescriptions for that too.

Finally, it’s worth noting something Kelton doesn’t discuss: keeping interest rates low hurts savers, whether they are saving for a rainy day, for college for the kids, for a down-payment on a home, or retirement. These are funds that people mostly don’t want to put at significant risk. But if interest rates are low, there is a real danger that inflation will slowly erode those savings. For example, health care costs are one reason people save for a rainy day. It’s likely that inflation in that sector is higher than the overall inflation rate. Low interest rates will hurt those savers. Similarly, college costs are rising faster than overall inflation, and in some cities, house prices and rents rise faster. In each case, the saver is a loser.

We should be thinking about that if we want to see progressive uses of MMT achieve their full potential.

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[Graphic via Grand Rapids Community Media Center under Creative Commons license-Attribution, No Derivatives]

[1] That’s my view, not Kelton’s. She says there is some evidence that crowding-out can be a problem for non-sovereign currencies, but not for sovereign currencies.

[2] This is accompanied by the idea that bank lending results in deposits, and those deposits fund another round of lending, etc. Each round of lending is smaller because banks are required to hold a percentage of all deposits in their reserves at the Fed. I was taught that this is the multiplier effect; it’s now called the money multiplier. We can ignore it for these purposes, because it leads to a larger number, but still one defendant on savings.

[3] Respectively, H.8, P. 2 Line 9 and H.8 P. 3, line 34.

MMT On Inflation

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Posts in this series
The Deficit Myth By Stephanie Kelton: Introduction And Index
Debunking The Deficit Myth

The second chapter of Stephanie Kelton’s The Deficit Myth deals with inflation. In Chapter 1, Kelton explains that the deficit is not a constraint on government spending. Instead, inflation is the important constraint. A deficit does not prove that the federal government is overspending. Only an increase in inflation proves Congress is overspending. Kelton says Congress shouldn’t tax and spend so as to deliver a balanced budget. Congress should spend and tax so as to deliver a balanced economy, one that serves all of us. She says that historically we have not done this, that we have chosen to focus of deficits and in so doing our economy has not served us well.

Definition and Description of Inflation

Inflation means a continuous rise in the price level. A bit of inflation is considered harmless and even something economists like to see in a healthy, growing economy. But if prices start rising faster than most people’s incomes, it means a widespread loss of purchasing power. Left unchecked, this would mean a decline in society’s real standard of living. In extreme cases, prices can even spiral out of control, gripping a country in hyperinflation. P. 44.

The danger of eroding incomes explains why everybody worries about inflation, and explains why politicians can use the threat of inflation to terrorize voters. It works, even though the problem for more than a decade hasn’t been too much inflation, it’s been too little. Ever since the Great Crash inflation has been less than 2% annually despite efforts of the Fed.

Kelton says that economists think of inflation as either cost-push or demand-pull. Demand-pull inflation occurs when consumer spending rises faster than the economy can produce goods and services. That hasn’t been a problem for a long time. Cost-push inflation can arise from disasters, which reduce the supply of something; from pricing power, as in the case of Big Pharma with its patents and trade secrets; or from workers gaining market power and demanding higher wages which businesses pass on to consumers. That last one is the only fear mainstream economists suffer, as far as I can tell.

The dominant theory of inflation stems from Milton Friedman’s monetarism:

According to Friedman, “inflation is always and everywhere a monetary phenomenon.” What he meant was that too much money is the culprit in any inflationary episode. If prices weren’t stable, it was because the central bank was trying to force the economy to create too many jobs by allowing the money supply to increase too rapidly.

The early neoliberal Friedman insisted that the Fed must never interfere with the workings of the market. Specifically, the Fed should not try to reduce unemployment below a certain level, which came to be called NAIRU, the non-accelerating inflationary rate of unemployment. Friedman thought there had to be some minimum level of unemployment in the economy. [1] The Fed bought into this view, as did politicians of all stripes. They all agreed that to keep prices stable, the US has to accept a certain level of unwanted unemployment. And to be on the safe side, maybe a bit higher level of unemployment. In practice, Congress dumped the problems of inflation and unemployment on the Fed.

But problems arose. The NAIRU isn’t visible or measurable. It can only be seen in retrospect. And now we are pretty sure there isn’t a clear relationship between inflation and unemployment, as the Fed assumed. [2] The Fed Chair, Jerome Powell, freely admitted to Rep. Alexandria Ocasio-Cortez that the Fed has been wrong about NAIRU, but defended its use on the grounds that “We need to have some sense of whether unemployment is high, low or just right.” P. 53.

2. The Problem of Unemployment

It turns out that the Fed used the purported correlation between inflation and unemployment as its primary tool for controlling inflation, ignoring all other causes of inflation. When the economy heated up and unemployment dropped, workers gained market power, and their share of national income increased. That led the Fed to raise interest rates leading to a tightening of the economy and usually a recession, as the following chart shows.

Gray bars indicate recessions.


Kelton calls this a “human sacrifice”, forcing some people out of the workforce when they want to work and can be productive. She thinks we are asking too much of the Fed. It can’t spend money into the system; only Congress can do that. All the Fed can do is change the cost of borrowing. If unemployment is too high, the Fed can make borrowing cheaper, but it can’t force anyone to borrow. Usually when unemployment is high, no one wants to borrow. I note that this was what happened after the Great Crash. The Fed cut interest rates to zero and lowered bank reserve requirements, hoping to increase money going into the economy. It didn’t work.

3. The Job Guarantee

Kelton argues that a better way to deal with unemployment is a job guarantee. Every person who wants to work should be able to get a decent job with decent pay and decent benefits. If the private sector won’t provide those jobs, the government should. [3] Kelton discusses this idea and its foundations.

It would probably be impossible for Congress to monitor the economy closely enough to manage full employment by tweaking taxes and spending. A job guarantee would act as a safety-valve and an automatic stabilizer for the economy and help solve this problem, leaving the Fed free to focus on inflation. If the private sector needs all the workers it can find them. If not, the government hires people to do jobs that need doing. There is plenty of work that needs doing, and, as Kelton pointed out elsewhere, we can always use more flowers in our parks and boulevards.

4. Preventing Inflation

So how should Congress budget knowing that the only effective constraint on spending is inflation? What would change? The way Congress currently works is that every bill that calls for expenditures gets a score from the Congressional Budget Office that assesses the impact of the expenditure on the deficit over a ten-year period. If inflation were the constraint, then the CBO would offer a score based on the probable impact of the expenditure on inflation. If the economy is, as now, operating well below its capacity for producing goods and services, the possibility of inflation would be low.

If the economy is close to capacity, either as a whole or in part related to the area of expenditures, then Congress has to make hard calls. How important is the expenditure? Can we create “fiscal space” for the expenditure with taxes? For example, in the case of the entire economy humming along, a general income tax hike would take money out of most people’s hands so they would not be buying as much, leaving room for the government to buy more. If there is a bottleneck, a more focused tax or some other step might be necessary.

Conclusion

MMT recognizes that inflation is a crucial problem. It shows how it arises and how we should protect ourselves from it.

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[Graphic via Grand Rapids Community Media Center under Creative Commons license-Attribution, No Derivatives]

[1] Marx said that the reserve army of labour is a necessary part of capitalism. Hmmm.

[2] This relationship is embodied in the Philips Curve. I discuss it here.

[3] Other economists favor a universal basic income. Both have the added benefit of freeing workers from abusive or irritating employers. Your family won’t starve if you walk out on a bad situation.

After Having Let Off HSBC with an Inadequate Fine, Regulators Prepare to Let JPMC Off with No Fine

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It has been less than 18 months since JP Morgan Chase was fined $88.3 million for–among other things–sending a ton of gold bullion to Iran.

Yet JPMC’s regulators are about to scold JPMC–and demand it improve the compliance programs it promised to improve 18 months ago–again.

Only, having found JPMC didn’t implement the promised compliance programs after being fined, JPMC’s regulators this time will not fine the bank for violating US law.

A U.S. regulatory probe of JP Morgan Chase & Co is expected to result in an order that the bank correct lapses in how it polices suspect money flows, in an action expected as soon as Friday, people familiar with the situation said.

The action would be in the form of a cease-and-desist order, whichregulators use to force banks to improve compliance weaknesses, the sources said.

The order is expected to be issued by the Office of the Comptroller of the Currency and the Federal Reserve.

JP Morgan is not expected to pay a monetary penalty, according to one person familiar with the situation.

This is what counts as seriousness from US bank regulators–ever quieting peeps when American banks openly flout the law (they’re a bit harsher with European banks, though still believe in forgiving such banks for things like material support to terrorism).

A teenager busted for shoplifting would pay more in fines than JPMC reportedly will pay for helping crooks–even alleged assassins–do their crime.

 

Barney Frank: “As Well as To Financial Regulators”

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When I first read about this letter from retiring Financial Services Committee Ranking Member Barney Frank to Eric Holder, I thought it akin to what retiring Homeland Security Chair Joe Lieberman did on the Sunday shows when he aggressively called for gun control: a PR stunt by an outgoing top Committee member, addressing a problem in all-but retirement that he didn’t address while he had the authority to do so in Congress.

Dear Mr. Attorney General:

I note several instances recently in which Administration officials have proceeded civilly against blatant violations of our important financial laws, in part because of the difficulty of proving cases beyond a reasonable doubt, especially where the law may have been somewhat uncertain, but also because of a concern that the criminal conviction—and even indictment—of a major financial institution could have a destabilizing effect. This latter consideration does not apply, similarly, to individuals. It is, of course, the case that no corporation can have engaged in wrongdoing without the active decision of individual officers of that entity. I believe it is also the case that prosecuting individuals has more of a deterrent effect than prosecuting corporations.

I am writing to you as well as to financial regulators, understanding that the decision to pursue criminal proceedings rests with the Justice Department, so I ask that there be a series of consultations involving law enforcement officials and regulators with the goal of increasing prosecution of culpable individuals as an important step in seeing that the laws that protect the stability and integrity of our financial system are better observed.

BARNEY FRANK

And that may well be what this is: an effort to pile on all the calls for prosecuting the banksters.

But I am fascinated by that second paragraph, the mention of the financial regulators. Consider this NYT account of HSBC’s wrist-slap that Bill Black highlighted.

Despite the Justice Department’s proposed compromise, Treasury Department officials and bank regulators at the Federal Reserve and the Office of the Comptroller of the Currency pointed to potential issues with the aggressive stance, according to the officials briefed on the matter. When approached by the Justice Department for their thoughts, the regulators cautioned about the effect on the broader economy.

“The Justice Department asked Treasury for our view about the potential implications of prosecuting a large financial institution,” David S. Cohen, the Treasury’s under secretary for terrorism and financial intelligence, said in a statement. “We did not believe we were in a position to offer any meaningful assessment. The decision of how the Justice Department exercises its prosecutorial discretion is solely theirs and Treasury had no role.”

Still, some prosecutors proposed that Attorney General Eric H. Holder Jr. meet with Treasury Secretary Timothy F. Geithner, people briefed on the matter said. The meeting never took place. [my emphasis]

DOJ went to Treasury and the Fed and OCC and asked for permission to get HSBC to plead guilty to Bank Secrecy Act violations. According to Cohen, Treasury said they had no meaningful assessment. According to NYT, the regulators–the Fed and OCC–raised concerns about the broader economy.

And Barney Frank says he is writing financial regulators (in addition to Holder himself) about bank immunity, but this appears not to be the letter to financial regulators, because they are not CC’ed on the letter. Yet he has not released a separate letter to regulators to the press (though if my attempts to get this letter this morning are any indication, Frank’s staffers have already moved onto look for new jobs).

This suggests there’s another letter to the people who told DOJ to let HSBC skate.

It’s worth noting that one of these regulators–OCC–was broadly implicated by the Permanent Subcommittee Investigation of HSBC.

In any case, there seems to be more to what Frank is doing. It may be he’s just trying to push Holder to meet with TurboTax Timmeh and the financial regulators, as Holder’s prosecutors attempted to make happen. Or he may be doing something else here, potentially even coaxing regulators to embrace individual indictments to stave off the larger anger about the HSBC wrist-slap.

It may well be this is a show. But it appears that we’re only seeing half the show.

How the Fed Helped Qaddafi Keep His $200B in Loot

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I suggested yesterday that the West will be playing dumb about the extent to which Qaddafi looted the Libyan people becomes known.

But what about how Qaddafi looted us–or, at least, the Fed?

As this article laid out, one of the means by which Qaddafi was looting was the Central Bank of Libya.

Moammar Kadafi secretly salted away more than $200 billion in bank accounts, real estate and corporate investments around the world before he was killed, about $30,000 for every Libyan citizen and double the amount that Western governments previously had suspected, according to senior Libyan officials.

The new estimates of the deposed dictator’s hidden cash, gold reserves and investments are “staggering,” one person who has studied detailed records of the asset search said Friday. “No one truly appreciated the scope of it.”

[snip]

Most of the money was under the name of government institutions such as the Central Bank of Libya, the Libyan Investment Authority, the Libyan Foreign Bank, the Libyan National Oil Corp. and the Libya African Investment Portfolio. But investigators said Kadafi and his family members could access any of the money if they chose to. [my emphasis]

Central Bank of Libya was a significant owner (and is now a 59% owner) in the Arab Banking Company, which got $35B of loans during the crisis.

Arab Banking Corp., the lender part- owned by the Central Bank of Libya, used a New York branch to get 73 loans from the U.S. Federal Reserve in the 18 months after Lehman Brothers Holdings Inc. collapsed.

The bank, then 29 percent-owned by the Libyan state, had aggregate borrowings in that period of $35 billion — while the largest single loan amount outstanding was $1.2 billion in July 2009, according to Fed data released yesterday. In October 2008, when lending to financial institutions by the central bank’s so- called discount window peaked at $111 billion, Arab Banking took repeated loans totaling more than $2 billion.

Yet all the time the ABC was borrowing $2B chunks of money, Qaddafi was sitting on $200B, which he could have used to provide the bank liquidity.

Mind you, this kind of looting was no doubt going on–and is no doubt going on today, as big banks refuse haircuts in Europe and housing fraud settlements–more generally. Qaddafi is just the very ugly face of how the Fed lending allowed people and corporations who had been looting for some time were able to keep that loot.

The Problem with Purportedly Apolitical Policy Wonks: Their Faulty Logic

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Peter Orszag opines from the politically sheltered comfort of his gig at Citigroup that we have too much democracy.

I’ll say more about specific claims he makes below, but first, let me point out a fundamental problem with his argument. He suggests we need to establish institutions insulated from our so-called polarization to tackle the important issues facing this country. That argument is all premised on the assumption that policy wonks sheltered from politics, as he now is, make the right decisions. But not only is his own logic faulty in several ways–for example, he never proves that polarization (and not, say, money in politics or crappy political journalism or a number of other potential causes) is the problem. More importantly, he never once explains why the Fed–that archetypal independent policy institution–hasn’t been more effective at counteracting our economic problems.

If the Fed doesn’t work–and it arguably has not and at the very least has ignored the full employment half of its dual mandate–then there’s no reason to think Orszag’s proposed solution of taking policy out of the political arena would work.

Here’s Orszag’s initial claim that polarization is dooming our country.

During my recent stint in the Obama administration as director of the Office of Management and Budget, it was clear to me that the country’s political polarization was growing worse—harming Washington’s ability to do the basic, necessary work of governing. If you need confirmation of this, look no further than the recent debt-limit debacle, which clearly showed that we are becoming two nations governed by a single Congress—and that paralyzing gridlock is the result.

There are a couple of problems with this. First, in response to the debt limit charade, voter approval of Congress and the President pretty much tanked. And while we don’t know how voters will act on their disgust with Congress’ (and the President’s) inaction, polling at least suggests that Congress will pay for the debt limit fiasco. It also suggests that support for the Tea Party, the architect of that fiasco, continues to decline. Which seems to suggest that democracy is working, it will end up punishing elected representatives for playing games with our country’s future, it will have precisely the result you’d want for such idiocy.

Add in the fact that Orszag later points to the automatic triggers that that flawed political process put in place.

Beyond automatic stabilizers, we also need more backstop rules: events that take place if Congress doesn’t act. In this sense, the fiscal trigger created as part of the debt-limit negotiations is a good step forward. It leads to automatic spending reductions if Congress doesn’t enact measures to reduce the deficit; in other words, it changes the default from inaction to action.

In other words, Orszag points to the debt-limit fiasco (and returns to it in his closing paragraph) as the best example of the problem with politics, but then points to the automatic triggers that resulted from that fiasco as a good thing. I don’t necessarily agree with him on that point, but his own logic doesn’t make any sense. He’s simultaneously saying the debt limit fight was the worst thing ever, but applauding the result.

Curiously, while Orszag tries to claim that the problem with all of Congress is polarization, rather than polarization being a problem in the House and Senate rules being a problem in the Senate (plus, the money in politics and crappy political journalism I mentioned earlier), he makes no mention of the number of centrists in the Senate. Perhaps that’s because the centrists back policy proposals (like immediate cuts) to the right of what Orszag proposes in his piece (which notes that economists advocate holding off on cuts and advocates for progressive taxation). The most likely outcome of more non-partisan or bipartisan commissions, then, are policies that aren’t the ones Orszag champions.

Which means the key to these so-called independent commissions would immediately get us into the question of who chooses them? Peter Orszag cites, among others, former Vice Chair of the Fed, Alan Blinder with approval; but he has been criticized for his own failed independence. Will we use the process that resulted in the selection of Ben Bernanke and the rest of the current Fed, that hasn’t even fulfilled its mandate, much less necessarily made the right decisions on restoring our economy?

In short, Orszag promises that independent wonks will make the right decisions for the country. But in making that argument he shows that even policy wonks sheltered from politics, like him, allow bad logic and personal biases to cloud their decisions.

Fed Lending: Bailing Out Banks over People

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Bloomberg has a good summary and even better visual database of the various forms of Fed lending that have been revealed over the years since the bailout.

I encourage you to go play around in the database. For example, check out this summary of how the Fed lent Hypo Real Estate Holding AG, a German real estate company, $28.7B to keep the German banking system afloat after HRE’s subsidiary Depfa crashed in Ireland. Germany had already given HRE $206B; the Fed’s lending amounted to $21M for each of HRE’s 1,366 employees. And at its height, just the Fed’s lending represented 15,000% of HRE’s market value. And yet all of this remained a secret for three years after the Fed first started lending to HRE.

With the scope of all that in mind–with a way to visualize the incredibly leveraged house of cards this secret lending held up–now read what I consider to be the most important line in Bloomberg’s summary.

By 2008, the housing market’s collapse forced those companies to take more than six times as much, $669 billion, in emergency loans from the U.S. Federal Reserve. The loans dwarfed the $160 billion in public bailouts the top 10 got from the U.S. Treasury, yet until now the full amounts have remained secret

Fed Chairman Ben S. Bernanke’s unprecedented effort to keep the economy from plunging into depression included lending banks and other companies as much as $1.2 trillion of public money, about the same amount U.S. homeowners currently owe on 6.5 million delinquent and foreclosed mortgages. The largest borrower, Morgan Stanley (MS), got as much as $107.3 billion, while Citigroup took $99.5 billion and Bank of America $91.4 billion, according to a Bloomberg News compilation of data obtained through Freedom of Information Act requests, months of litigation and an act of Congress.

“These are all whopping numbers,” said Robert Litan, a former Justice Department official who in the 1990s served on a commission probing the causes of the savings and loan crisis. “You’re talking about the aristocracy of American finance going down the tubes without the federal money.” [my emphasis]

That is, the money the Fed lent out to these highly leveraged risk takers could have paid off (much less merely guaranteed) the 6.5 million delinquent and foreclosed mortgages that are currently dragging down the American economy.

But instead of offering money to homeowners who would have used it to stay in their homes and sustain their neighborhoods, the Fed instead loaned it to the banks that were leveraged to the hilt.

So here we are worried about the moral hazard of modifying principal on loans that were vastly overvalued. Here we are shredding the rule of law to try to let Bank of America (which borrowed $91.4B) off for its crimes for a mere $20B or so.

And, for the most part, all those corporations that secretly sucked of the Fed’s teat are still in business, gleefully lecturing others about moral hazard.

Fed Orders New Stress Tests

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One of the things the Congressional Oversight Panel recommended the other day was new stress tests for banks, given the mounting evidence that botched securitization may make them insolvent (okay — that last bit is my shorthand).

Today, the Fed ordered up those stress tests.

The Fed, in guidance issued today, said all 19 banks must submit capital plans by early next year showing their ability to absorb losses under a set of conditions to be determined by the central bank. The request is part of the Fed’s effort to step up supervision at the nation’s largest financial firms.

While new stress tests are a no-brainer — at some point we’re all going to have to admit that Bank of America is insolvent and should be wound down — I’ve got zero confidence these new stress tests will be anything different than the kabuki stress tests the banks had in the last go-around: that is, a “test” designed to ensure everyone passes.

Rahm and Axe: Timmeh Has Got His Groove Back

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What a ridiculous piece of crap this A1 article by Anne Kornblut is, proclaiming that Eric Holder is having a good week.

It parrots conventional wisdom about what a bad time Eric Holder has had–pointing to turf battles he lost, rather than matters reflecting on the success or failure of DOJ itself. And then proclaims that the arrest of Faisal Shahzad makes all those political battles disappear, at least for this week. For Anne Kornblut, it’s more valuable for the Attorney General to win the approval of a bunch of demagoguing political enemies than to get one after another terrorist to plead guilty and cooperate with the government.

Which sort of tells you about Kornblut’s judgment.

But it’s not Kornblut’s judgment that is most ridiculous in this article. It’s Rahm and David Axlerod’s:

Likewise, White House Chief of Staff Rahm Emanuel acknowledged that Holder had “a very good week,” comparing his ups and downs to those experienced by Treasury Secretary Timothy F. Geithner. “A year ago, people were saying Geithner isn’t what he’s supposed to be — and now he has his mojo back,” Emanuel said Wednesday. “The same with Eric.”

David Axelrod, a senior adviser to President Obama, drew an identical comparison in a separate interview, saying: “Washington is a town of ups and downs, and there are other members of the administration — I think of Geithner, for example — who was in the barrel for a while. And it’s just the way this town works.”

So apparently Anne Kornblut felt her little theory that Eric Holder had a good week was important enough to ask the White House Chief of Staff about.

Really, Anne? That’s what you waste Rahm’s time with? Rather than, say, a question about the coordination between Janet Napolitano and John Brennan on terror strikes and oil spills, something that is not only part of the Chief of Staff’s job description but actually matters?

Apparently, though, both Rahm and Axe not only took her call to answer such an inane question, but they gave her … exactly the same answer. “Sure Anne, Holder has had a good week, but have you noticed what a good week Timmeh is having?” That is, both of them magically turned her inquiry about Holder’s mojo into a question to highlight what they claim to be Tim Geithner’s mojo.

Really, Rahm? Really, Axe?

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