Don’t be fooled

The best you can say is it appears the financial system has “stabilized.” It’s at least fascinating, but actually kind of scary when you consider how the government and the banking giants manage to delay confronting the gargantuan toxic asset problem. Either explicitly or with winks and nods, everyone puts off the day when we attempt to place a value on the mess. In the meantime to distract us, the Treasury did its stress tests and just about all the institutions passed, some banks give back their TARP loans, Citibank and Morgan Stanley raise salaries, and Goldman Sachs may be salting away a record bonus pool from recent trading gains. So the implicit message from all this is we can all feel comfortable again about our credit system.

But then again, the banks still aren’t lending much, while building record reserves. The government has ditched even the lip service for TARP rationale that banks should lend more even though many economists and business people say that more available credit is essential for jump starting business growth and generating a recovery.   Nobody talks about marking to market anymore—the accounting regulators have been admonished to back off.  And it’s hands off trying to untangle the mortgage securities markets.

Clearly, the people closest to the toxic asset problem don’t want the rest of us to know how bad it is for fear that kind of news will spook the markets and send us back into a tailspin. So the hiding and distraction game goes on. The banks with the encouragement of government continue to build up reserves to deal with the huge scale of potential asset losses. And the government dances around the question of why it isn’t forcing the banks to lend more. Instead it prints money and pushes out stimulus funding, creating record deficits   Clearly, building up bank reserves at any price is more important than  lending under the extremely dire circumstances.

And everyone hopes that the economy can get back in gear without more credit and a lot of feel good kabuki plus all that government stimulus. If recovery takes hold then asset values could regain enough lost ground so the banks and institutions can finally take manageable write downs within range of their built up reserves. Once that happens, transaction activity and more normalized lending can resume, and the banking system will finally be out of the woods.

In other words, we’re still in very deep trouble.  

Comments

[Mike]

Nailed it. Why do we all kid ourselves into believing things have gotten better. Either a) the problem wasn't that bad to begin with or b) we are ignoring the elephant in the room. Without growth, real economic growth, we are in a boatload of trouble.

[terrig]

Pretend and Extend, baby.

[JWB]

Now the "right" politicans are in office, they are trying to talk us out of a recession. Why are you raining on their parade with minor details like core issues and facts?