If you think back several weeks with me, you’ll remember the the Treasury announcing a “bank stress test” that would help determine what banks had enough liquidity to stay functional.  Former Bank regulator, William Black, believes it’s a sham in order to make the public believe the government is taking action:

There are no real stress tests going on. 

If you did a real stress test, as Geithner explained them, you wouldn’t just have a $2 trillion hole — you’d impose regulatory capital requirements of 50%…

You can’t conduct a meaningful stress test without reviewing (sampling) the underlying loan files and it seems likely that the purchasers of securitized instruments (not just mortgages) do not even have the loan file data…

As Geithner describes the process, NO ONE can conduct reliable “stress testing.” It inherently requires testing everything in every way any and all aspects of everything could conceivably interact. It also doesn’t provide any meaningful output that can be operationalized (unless you want to force an enormous rise in minimum regulatory capital requirements, which he obviously doesn’t want to do).

A number of other economists also question the point of the stress test.  The general feeling was that the “worst case” economic scenarios that were used in the stress test did not even come close to recreating the conditions the financial industry really will be facing.

If, indeed, the stress test was a sham AND the economic scenarios used during the test do not reflect reality, what does it mean that the U.S. Government is going to delay the stress test results until AFTER the earnings season that just started in order to prevent a market panic.

To me, this really means three things:

1. Even under the easy standards set in the stress test some financial institutions cannot pass the test
    
2. The government is looking to buy time in order to develop a plan for the banks that are insolvent
    
3. If the plan for insolvent banks is nationalization, the Treasury Secretary expects the stock market to react in a highly negative manner.
    

With the Alcoa news this week, the Fed Meeting Minutes showing the recovery will be longer off than expected and the release of TARP funds to Life Insurance companies today, what does it mean to hear the Treasury is planning on delaying the bank test results?  

Easy.  The worst of the worst is not even upon the financial market as of yet….

Over the weekend, China publicly called for the International Monetary Fund (IMF) to dump the U.S. dollar as the currency of choice and create a new global currency detached from the fates of individual nations.

The latest blast from Beijing: a call by China’s top central banker to dump the U.S. dollar as the world’s most important currency. People’s Bank of China Governor Zhou Xiaochuan, in a paper released on the bank’s Web site on Mar. 23, called for a new “super-sovereign reserve currency” to replace the current reliance on the dollar. The goal, Zhou writes, is to “create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run.”

…

By calling for a super-sovereign reserve currency, Zhou signals China’s dissatisfaction with the global economic pecking order. As well as demonstrating Beijing’s new more assertive role in the world economy, Zhou’s proposal to replace the dollar may also signal China’s intention to move more aggressively to diversify its foreign exchange holdings. Zhou’s paper contains a “hint of a threat that the U.S. should not take the dollar’s privileged status for granted,” Mark Williams, international economist at Capital Economics in London, wrote in a Mar. 24 report.

Obviously, U.S. policy makers wouldn’t be rushing to agree to such a proposal. During the President’s press conference yesterday evening, Mr. Obama stated:

The reason the dollar is strong right now is because investors consider the United States the strongest economy in the world with the most stable political system in the world,’ he said. ‘You don’t have to take my word for it, I think that there is a great deal of confidence that ultimately, although we are going through a rough patch, that prospects for the world economy are very very strong.’

Asked about suggestions by China and Russia that the world move toward a single global currency, Obama said, ‘I don’t believe that there’s a need for global currency.’

Situation finished, right? Nope…. Treasury Secretary Tim Geithner comments that contradict the message Obama is sending.

Tim Geithner:

“I haven’t read the governor’s proposal. He’s a very thoughtful, very careful distinguished central banker. I generally find him sensible on every issue,” Geithner said, saying that however his interpretation of the proposal was to increase the use of International Monetary Fund’s special drawing rights — shares in the body held by its members — not creating a new currency in the literal sense.

“We’re actually quite open to that suggestion – you should see it as rather evolutionary rather building on the current architecture rather than moving us to global monetary union,” he said.

When pressed on the subject, Geithner backtracked:

Evidently sensing a gaffe, moderator Roger Altman told Geithner that it would be “useful” to return to the question, and asked if he foresaw a change in the dollar’s centrality.

“I do not,” Geithner said, adding several forceful promises, including, “We will do what’s necessary to say we’re sustaining confidence in our financial markets.”

Let’s tally this mistake up to poor wording on Geithner’s part. Fine. Look at the damage the assumed gaffe has caused – erasing almost 300 points from the DOW and the dollar losing 1.3% of it’s value compared to the Euro.

While these are short term losses, it just goes to show how the market reacts to a mixed message out of our government. Much as the Bush Administration needed to get the public message on the same track, the Obama Administration needs to do the same.

In the end, I don’t care what the message is… just get on the same page.

For months now, the Fed and the Treasury Secretaries (Paulsen and Geithner) have expressed confidence in the free market. Extreme market conditions call for unprecedented actions by the government, all in the name of propping up the U.S. financial system. What if, however, there is more at work?

Yesterday, the Fed refused to provide information on what financial institutions obtained money. The reasoning? Such information would potentially damage the reputations and/or create a lack of confidence in banks that obtained money.

Fed Refuses to Release Bank Lending Data, Insists on Secrecy

The Fed refused yesterday to disclose the names of the borrowers and the loans, alleging that it would cast “a stigma” on recipients of more than $1.9 trillion of emergency credit from U.S. taxpayers and the assets the central bank is accepting as collateral.

If you note, the same article points out:

Fed Chairman Ben S. Bernanke and then Treasury Secretary Henry Paulson said in September they would meet congressional demands for transparency in a $700 billion bailout of the banking system.

What changed between September and now? Aside from the economic desperation increasing more than anyone could have expected, not much else. Auditors, economists and government officials all knew the financial institutions were facing insolvency. The financial markets were well aware then, as they are now, the banks were on the brink. As such, it is hard to make the argument that confidence in banking system would be tarnished by releasing information showing who received money.

The damage is done; the horse is out of the barn.

While reassuring to hear the Fed say transparency would be forthcoming, the reality is the Federal Reserve acts independently of Congress and the President. This body has the ability to do whatever they wish, without the need for government approval and have no duty to explain their actions to a governing body.

Maybe the lack of transparency comes from the Federal Reserve deciding who is going to survive the crisis? Maybe the Federal Reserve is taking advantage of the credit crisis in order to reshape the financial system after years of neglect.

I do not wish to sound paranoid, or some crackpot conspiracy theorist, but looking at the whole body of evidence it is clear the Federal Reserve, as well as the Treasury, is withholding information for some unknown reasons. Be it a lack of economic understanding, or something more calculated, it’s clear there is an undercurrent the general public is being left out of.

If the actions of the Federal Reserve are designed to select the survivors of the financial crisis, and not let the market direct such a decision, this would be a clear sign that the idea of capitalism as the world believed it to be was a failure.

Within the last 6 weeks the nation was told that consumer confidence has dropped to an all-time low, foreclosure rates jumped 81% in 2008, unemployment now stands at 7.6%, the auto industry faces the worst market in decades, and the national deficit will be the largest ever – 1.5 trillion – what else is there that could be said that we don’t already know?

How about a bit of potential hope?

This morning, the Fed Chairman Ben Bernanke said the following:

In their economic projections for the January FOMC meeting, monetary policy makers substantially marked down their forecasts for real GDP this year relative to the forecasts they had prepared in October. The central tendency of their most recent projections for real GDP implies a decline of 1/2 percent to 1-1/4 percent over the four quarters of 2009. These projections reflect an expected significant contraction in the first half of this year combined with an anticipated gradual resumption of growth in the second half.

Federal Reserve policymakers continued to expect moderate expansion next year, with a central tendency of 2-1/2 percent to 3-1/4 percent growth in real GDP and a decline in the unemployment rate by the end of 2010 to a central tendency of 8 percent to 8-1/4 percent.

If actions taken by the Administration, the Congress, and the Federal Reserve are successful in restoring some measure of financial stability–and only if that is the case, in my view–there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery.

With the inconsistent message coming out of the last two administrations regarding the economic climate, I’m unsure how to take Bernanke’s comments. Is he implying that, in the best of all possible worlds, if everything good that can happen does, the economy will start to grown once again at the end of this year?

The world we live in today has very, very pessimistic economic data in every category – none of which points to a near term recovery – so what information is Bernanke (and the Fed) looking at to draw this conclusion? Bernanke does not appear to be a person who would make a statement in order to calm the stock markets, so this just makes me wonder what else is going on that we are unaware of.

One thing I fear about the current economy, and the attempts to move a recovery forward is President Obama’s pledge to cut the federal deficit by roughly half over the next four years.

No detailed approach has yet to be presented to the public, but what little information that is known points to a significant cut in defense spending (ending/scaling back the war in Iraq) and raising taxes on the nations richest.

What bothers me about the heavier taxation is the potential effect on the recovering economy. During the Great Depression, Hoover raised taxes as an attempt to balance the budget. This decision only lengthened, if not strengthened, the economic downturn. While one would not expect the top marginal rate to rise to great depression levels, it still is a dangerous line to walk – less disposable income leads to less economic activity.

Another bit of promise was provided by Bernanke today when he plainly stated:

“We don’t need majority ownership to work with the banks,” Bernanke said today. “We have very strong supervisory oversight. We can work with them now to do whatever is necessary.”

Translation: There is no need to nationalize banks.

That is what the administration is saying right now, but as this entire situation has taught economists everywhere this is an ever-changing situation. What is workable today my not be so tomorrow.

With the President speaking this evening, and Treasure Secretary Tim Geithner presenting more information on the banking plan tomorrow, the next few days will be very interesting to watch.

2/24 – 8:17PM UPDATE

Calculated Risk has an interesting question/point on this very subject.

If the banks are seriously insolvent, this sounds like the zombie bank approach and rewards existing shareholders at the expense of taxpayers. If the banks are not seriously insolvent, this is a reasonable approach. But how does Bernanke know the solution before the data is available from the stress tests?

So how can Bernanke say that no nationalization will take place if the data to determine so has not yet been established?  Makes one wonder just a bit more, doesn’t it?  I want to know what Bernanke knows that he is not saying…and if he is not syaing it, why is he withholding the information?  It’s clearly positive if he can determine that no nationalization is needed.

I understand there is a significant cost behind the architecture, infrastructure and deployment a network the size that Comcast has developed, but one would think that the company would also be able to successfully run the network once in place, wouldn’t you?

Whenever the weather changes, be it a drop in temperature, rain, or significant wind, the Internet service provided by Comcast either slows down noticeably or all together stops.  When one calls the support center, most times, they have no clue as to a) any issue or b) how to help you.

I’m not saying they are evil, as others do, but come on! For $55 a month I would expect better service…

Tim Geithner and his inspiring confidence

During the Senate nomination of Tim Geithner, David Axelrod called on individuals to look past Geithner’s tax errors because Tim “inspires great confidence” and Rahm Emanuel called Geithner “the right man for the job.” 

Well, take a look what happens when the right man for the job, who inspires great confidence, speaks:

Obviously, that reflects the confidence of Wallst. 

Ford and GM see the car market stabilizing

Maybe my observation from two weeks ago was right after all…  I made the comment that I noticed a number of “new” cars on the road.  Well, a number of cars that had temporary license plates.  Despite having horrific sales in January, Ford and GM now say the automotive market is showing signs of stabilization.

Jim Farley, Ford Motor Co.’s global marketing chief, said Wednesday that seasonally adjusted retail sales demand has held steady for the past four months. Meanwhile, the country’s used car market has come “roaring back” since January.

“That shows me that credit’s available,” Farley said after a Ford presentation at the Chicago Auto Show. “When we’re seeing the kind of growth in the used car market that we’ve seen in the last six weeks, that is a really important milestone for the bottoming out of the industry.”

While new cars are not moving, it looks like the used car market MAY be picking up a bit.

Hello, pot… this is kettle calling again… just wanted to point out that you are black.

At a news conference today, Treasury Secretary Tim Geithner said that move the administration are currently making are aimed at “restoring trust” in the financial system. If that is the case, if President Obama wanted to restore trust, wouldn’t it make sense to fire Tim Geithner? Larry Kudlow, economist and journalist, thinks so as well:

Geithner never answered the question put to him by senators Kyl and Bunning: Would he have paid his back taxes if he were not nominated to run the Treasury? His issue has never been resolved. He will never have the full trust of the country…This is a matter of personal character and accountability. It is a matter of honesty. Too many of our leaders suffer big deficits in these areas.

How can we trust a man who “forgot” to pay his taxes for a few years to restore trust in the system?

Compensation limiting for executives tied to bailout money?

Not to be ringing the socialist alarm once again, but what does limiting the compensation of executives sound like to you? In no way am I advocating that people should be making millions a year for driving a company into the ground but this has the potential to open the door to other such actions in the name of “market stability”.

Actually, I’ll go one step further and say that a case can be made for why a company that requested funds should be limited to how the money is spent. Ok, that sounds fair… until you hear one name: J.P. Morgan

J.P. Morgan/Chase was forced to take TARP funds from the government.

J.P. Morgan was not in need of capital funding, nor did they request it, so why should J.P. Morgan/Chase be limited to what they pay their management? I understand the need to limitation, but when you start forcing companies to do thing – like take the funding, then what executives should earn – is a very dangerous.

ion Television

No clue what cable channel ion Television is but Heat, the Michael Mann classic and arguably one of the top 10 movies of the last 30 years, is on right now. I know what I am going to do….

UPDATE 2/5/09, 3:32 PM – it turns out that J.P. Morgan and Goldman Sachs will not be limited when it comes to compensation.