Friday links roundup: Who needs a AAA credit rating anyway?

Tim Geithner
Tim Geithner

The must-read this time around is “The crisis and how to deal with it,” a New York Review of Books symposium featuring Paul Krugman, Nouriel Roubini, Niall Ferguson, George Soros, and Robin Wells. The transcript’s here.

Treasury Secretary Timothy Geithner committed to cutting the budget deficit as concern about deteriorating U.S. creditworthiness deepened, and ascribed a sell-off in Treasuries to prospects for an economic recovery.

“It’s very important that this Congress and this president put in place policies that will bring those deficits down to a sustainable level over the medium term,” Geithner said in an interview with Bloomberg Television yesterday. He added that the target is reducing the gap to about 3 percent of gross domestic product, from a projected 12.9 percent this year.

The dollar extended declines today after Treasuries and American stocks slumped on concern the U.S. government’s debt rating may at some point be lowered. Bill Gross, the co-chief investment officer of Pacific Investment Management Co., said the U.S. “eventually” will lose its AAA grade.

–Bloomberg, Geithner vows to cut U.S. deficit on rating concern

The financial channels are abuzz with talk of a recovery, but we’re not out of the woods yet. In fact, the deceleration in the rate of economic decline is not a sign of recovery at all, but proof that the economy is resetting at a lower level of activity. That means the recession will drag on for some time no matter what the Fed does.

The problem is the breakdown in the securitzation markets which has cut off the flow of easy credit to consumers and businesses. The credit-freeze has caused a sharp drop in retail, auto sales, furniture, electronics, travel, global trade etc. Every sector has been hammered. Fed chief Ben Bernanke’s lending facilities have helped to steady the financial system and Obama’s fiscal stimulus will take up some of the slack in demand, but these are not a cure-all for a broken credit system. If the system isn’t fixed, asset prices will continue to plunge and hundreds of financial institutions will face bankruptcy.

–Mike Whitney, The real lesson of the financial crisis

On the economy, we already know five important things. First, when the US catches pneumonia, everybody falls seriously ill. Second, this is the most severe economic crisis since the 1930s. Third, the crisis is global, with a particularly severe impact on countries that specialised in exports of manufactured goods or that relied on net imports of capital.

Fourth, policymakers have thrown the most aggressive fiscal and monetary stimuli and financial rescues ever seen at this crisis. Finally, this effort has brought some success: confidence is returning and the inventory cycle should bring relief. As Jean-Claude Trichet, president of the European Central Bank, remarked, the global economy is “around the inflection point,” by which he meant that the economy is now declining at a declining rate.

–Martin Wolf, This crisis is a moment, but is it a defining one?

While 17 financial institutions have repaid TARP funds, only one has come to terms with the U.S. on the value of the rights to buy stock that taxpayers received for the risk of recapitalizing the industry. That was Old National Bancorp in Evansville, Indiana, which gave the Treasury Department $1.2 million for warrants that may have been worth $5.81 million, according to the data.

If Geithner makes the same deal for all companies in the rescue program, lenders may walk away with 80 percent of profits taxpayers might have claimed.

–Bloomberg, TARP warrant sale shows banks may reap “ruthless bargain”

More: Financial Times, Markets fall amid fears of downgrade; Bloomberg, Japan economy shrinks record 15.2% as exports, spending plunge; Dean Baker, The banker boys are all right!; NYT, Credit card industry aims to profit from sterling payers; Baseline Scenario, Many countries are worse off than we are; Lawrence Mishel/Economic Policy Institute, Sounding the alarm: Update on the economic downturn (includes a great slideshow).

Comments (2)

  1. Submitted by Richard Schulze on 05/22/2009 - 04:32 pm.

    “We’re All Subprime Now”

  2. Submitted by Richard Schulze on 05/23/2009 - 12:40 pm.

    The banks job was to determine how much credit the consumer could afford. Suddenly the boundaries of how much credit you can acquire have changed radically. It was not that long ago that someone who made 60,000 pr/yr could have a 100,000 line of credit.

    Both Banks and consumers need to have a wake up call and start talking about what personal responsibility is going to mean. When the average American has far more debt than they can afford.

    If they focus on repaying their debt there is no money left over to jump start the economy and get out of this recession.

    Our economy is dependent on 70% of consumer spending activity. It raises a whole series of questions about our future economy.

    If we start talking about lifestyles that are based on a certain income level without this extra amount of debt. Our standard of living by definition has to decline.

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