We can’t subsidize the banks forever

Wall Street Journal
by Matthew Richardson & Nouriel Roubini

05/05/09

The results of the government’s stress tests on banks, to be released in a few days, will not mark the beginning of the end of the financial crisis. If we are to believe the leaks, the results will show that there might be a few problems at some of the regional banks and Citigroup and Bank of America may need some more capital if things get worse. But the overall message is that the sector is in pretty good shape. This would be good news if it were credible. But the International Monetary Fund has just released a study of estimated losses on U.S. loans and securities. It was very bleak — $2.7 trillion, double the estimated losses of six months ago. Our estimates at RGE Monitor are even higher, at $3.6 trillion, implying that the financial system is currently near insolvency in the aggregate. With the U.S. banks and broker-dealers accounting for more than half these losses there is a huge disconnect between these estimated losses and the regulators’ conclusions...

//online.wsj.com/article/SB124147831175584985.html



Insolvent banks should feel market discipline

Financial Times
by Matthew Richardson and Nouriel Roubini

05/07/09

Joseph Schumpeter famously argued that the essence of capitalism was creative destruction, by which new economic structures are born from the rubble of older ones. The government stress tests on the 19 largest US banks … could have facilitated this process. The opportunity looks likely to be missed. The tests, which measure how viable banks are under adverse economic conditions, have no ‘failed’ category, even if as many as 10 are reported to need additional capital. … Once again, the question will be how the near-insolvent banks can be kept afloat, to avoid systemic risk. But the question we really should be asking is: why keep insolvent banks afloat?

//tinyurl.com/o6godd



A major investment risk: Congress at work

Christian Science Monitor
by Eric Singer

05/07/09

How much money did you lose last year? If you’re like most Americans, your retirement funds, college savings accounts, and any other investments tied to stocks suffered greatly. It didn’t have to be this way. You could have followed a simple investment rule that would have spared you from much of the past year’s losses. You could have invested only when Congress is on vacation. It may sound a little crazy, but I am totally serious. When Congress works – and by ‘works’ I mean ‘meddles’ — it destroys wealth. When Congress doesn’t work, wealth grows by itself. … As government power and influence grow, the trend has intensified in recent years. From 2000 through 2008, in-session performance of the S&P is –12.4 percent. The out-of-session performance: +8.8 percent...

//www.csmonitor.com/2009/0507/p09s02-coop.html


Informant: Thomas L. Knapp



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