Obama Cites "Glimmers of Hope"

The press has widespread coverage of President Obama’s meeting with his economic advisers (including Timothy Geithner, Ben Bernanke, Lawrence Summers, and Sheila Bair) from Friday, with most quoting Obama hopeful remark that “what you’re starting to see is glimmers of hope across the economy.” What’s the evidence? “Increased refinancing of home mortgages, money flowing from the $787 billion stimulus package and a 20 percent increase in government-backed loans to small businesses over the last month alone.”

But with that is increasing talk of the need for still more stimulus measures. There’s only $134 billion in TARP funds left, according to the Treasury, with new demands on the kitty coming from a number of financial industries. And a New York Times cover article warns of a coming “showdown” between banks and the government: “Some of the healthier banks want to pay back their bailout loans to avoid executive pay and other restrictions that come with the money. But the banks are balking at the hefty premium they agreed to pay when they took the money.” Indeed, six small banks have successfully returned the TARP money. Yet there’s still a fundamental disconnect: While banks claim to be doing better (pre-announcing profits, in the case of Wells Fargo) in the hope of averting greater government interference, the stress tests due to be announced in the next three weeks could show otherwise. The Times says that “[i]ndustry analysts estimate that United States banks alone have more than $1 trillion of such mortgages on their books but have recognized only a small share of the likely losses.” What’s more, “economists at Goldman Sachs estimated recently that banks were valuing their mortgages at about 91 cents on the dollar, far more than investors are willing to pay for them.”

One of those advisers who star has dulled, and who wasn’t at the meeting, is former Federal Reserve Chairman Paul Volcker, who hasn’t seen Obama in almost a month and whose Economic Recovery Advisory Board has yet to meet formally. Here’s some of the scoop, according to the Wall Street Journal: “Treasury Secretary Timothy Geithner unveiled the administration's plans for handling troubled financial institutions and the housing crisis without seeking input from Mr. Volcker, associates say. 'Paul was surprised' at the failure to consult him.” Obama White House adviser Austan Goolsee talks to him regularly, but Volcker’s stamp on policymaking has, as of yet, been hard to see.

On the other hand, the Wall Street Journal looks at Fed Vice-Chairman Donald Kohn, Ben Bernanke’s “loyal No. 2 and trouble shooter,” who has been at the Fed for nearly 40 years and has in the last 18 months helped transform the institution into a nimble, more transparent, more political, and more central player. It’s praises all around, as Alan Greenspan calls him “my first mentor” and former Fed governor Laurence Meyer anoints him “the most important nonchairman of the board in the history of the Fed.” The profile has him at the table doing the unwilling (helping arrange the Bear Stearns rescue, allowing AIG to disclose its counterparties) because “the mission now is to provide more information about its activities without giving away so much that it undermines its mission to be a lender of last resort.”

By the way, all the spending already out the door, spurred by the Fed and Treasury, is adding up, if you haven’t noticed. The Treasury Department released figures on Friday increasing the deficit by $192.3 billion in March. There’s little good news anywhere on the balance sheet: Tax revenues are down 13.6 percent in the last six months, and benefit payments from the unemployment trust fund have almost doubled in the last year.

The government’s micromanagement of the auto industry continues apace. It’s managing negotiations, “directly and not-so-directly”, with GM, Chrysler banks, and bondholders as they prepare for possible Chapter 11 bankruptcy filings, reports the Wall Street Journal. Instead of an exchange of bonds for cash and 90 percent of the company’s equity, the government wants GM to offer bondholders only a small portion of shares in the automaker. Stay tuned: “Treasury officials, many of whom are now working on GM's restructuring from an office in Detroit, plan to meet in coming days with a committee representing GM's bondholders.” At Chrysler, the concessions will be no less breathtaking: “[T]he U.S. wants banks and investors who control its bank debt to give up about 85% of the nearly $7 billion they are owed.” But some Chrysler bondholders still think they have a better chance in court, where, the Journal reports, they think they could get as much as 70 cents on the dollar back. That might not be so realistic, though: “With Chrysler bank debt trading at around 12 cents on the dollar, the government view has been, ‘Why offer more than 15 cents?’ said a person involved in the talks.”