Obama and the Augean Stables
by Charles Lemos, Tue Feb 10, 2009 at 07:19:55 PM EST
It is regrettable that back in the Fall during the heat of the Presidential campaign, no one but no one paid much attention to Joe Biden because of the four main contenders running for national office, he was, by far, the most candid. Sometimes that got him in trouble leading to accusations of having "rhetorical flourishes" but honesty in politics is something we should all appreciate especially when it is done with style, wit and intelligence. So it was back on October 20th at a Seattle fundraiser that ol' smokin' Joe told it as it truly is:
"Gird your loins. We're gonna win with your help, God willing, we're gonna win, but this is not gonna be an easy ride. This president, the next president, is gonna be left with the most significant task. It's like cleaning the Augean stables, man. This is more than just, this is more than - think about it, literally, think about it - this is more than just a capital crisis, this is more than just markets. This is a systemic problem we have with this economy."
Cleaning the Augean stables, the fifth of Hercules' labours. The Obama Administration tonight stands on the precipice of completing one of its Herculean tasks, passing the American Recovery and Reinvestment Act and we can debate whether it is sufficient from here to eternity but the truth is that we have a "systemic" crisis that requires our full attention.
It is also regrettable that few people pay attention to meetings of central bankers especially when they are meeting in far-off places like Kuala Lumpur at a forum of South East Asian Central Banks (SEACEN) to celebrate the golden anniversary of Bank Negara, Malaysia's Central Bank. Unlike politicians, central bankers have a penchant for candid assessments. Central bankers may lack foresight, but hindsight they have aplenty. Thus IMF Managing Director Dominique Strauss-Kahn's comments that US, Western Europe, and Japan are "already in a depression" are worth noting.
On January 28th, the IMF released projections that show that growth in global economy will be close to zero in 2009. It forecast deepening recessions in most of the world's advanced economies while the more robust export-oriented Asian economies would see growth fall to about 2½ percent. The IMF held out some prospects of a recovery in 2010, but even this will depend on strong policy action.
While the IMF rarely gets the cure right, they are pretty good at diagnosing the disease. Strauss-Kahn noted that while global policymakers have acted to "address the immediate threats to systemic stability", through massive liquidity support and extending deposit insurance, long-term threats remain unaddressed.
But more must be done to address the underlying lack of confidence in the solvency of the system, which stems from a lack of confidence that past losses have been properly recognized, and now also concern about new losses--extending well beyond real estate--as the economy turns down.
Mr. Strauss-Kahn said the urgent task for governments and central banks was to push the bank restructuring process forward--with an emphasis on cleansing balance sheets--using their authority to:
* Re-examine bank balance sheets on a worst-case basis, determine the viability of various institutions, and restructure them if required. Authorities need to be ready to respond as needed, including full-fledged intervention.
* Provide public support where necessary to banks that can be rehabilitated, in the form of capital, bad asset carve outs, and guarantees.
* Sell or wind-up insolvent banks quickly, depending on whether any franchise value remains.
* Establish new public resolution agencies to manage "bad assets" to maturity or sale.
All this brings us back to the Augean Stable that is the US banking sector. It's not just manure, it is toxic manure. Potential losses on US-originated credit assets alone are now $2.2 trillion, up from $1.4 trillion just last October according to the latest estimates from Goldman Sachs. In recent comments to the Financial Times, the pessimistic but largely correct Nouriel Roubini of RGE Monitor and the Stern School of New York University estimates peak losses on US-generated assets at $3.6 trillion.
It's time to admit reality, restructure banks and, above all, to close failing financial institutions whose levels of under-performing assets cannot be supported by balance sheet restructuring. There is a reason the market fell 382 points. Secretary of Treasury Geithner's plan simply does not do enough to clean out the Augean Stable that is the US financial sector. It's time to act before we really have to gird our loins.