Trouble In River City

It's Obama's 100th day and we're supposed to be reveling in feel-good stories and optimistic about the future, but, um...

The U.S. economy contracted at a surprisingly sharp 6.1 percent rate in the first quarter as exports and business inventories plummeted.

The drop in gross domestic product, reported by the Commerce Department on Wednesday, was much steeper than the 4.9 percent annual rate expected by economists and followed a 6.3 percent decline in the fourth quarter.

GDP, which measures total goods and services output within U.S. borders, has now dropped for three straight quarters for the first time since 1974-1975.

The only good news here is that inventory stocks have dropped, which means companies might have to start making things again if demand picks up. And consumer spending increased slightly. But we still have a major structural problem. The Federal Reserve believes that the ideal interest rate at this point would be negative five percent, an impossible figure. This is the kind of hole we're talking about. We're up to six banks that may need capital infusions in the wake of the stress tests, infusions that are unlikely to come from private investors. And unemployment probably won't rebound until next year.

Willem Buiter has reason for cautious pessmism. That sounds right.

...I support Sheila Bair's efforts to wrest authority to put the nation's biggest banks into FDIC receivership. I'm glad she's talking about this.

The “too-big-to-fail concept” should be “tossed into the dustbin,” and the FDIC should have the power to close “systemically important” financial firms, Bair said in a New York speech yesterday. “Given our many years of experience resolving banks and closing them, we’re well-suited to run a new resolution program,” she said.

“If the FDIC had the authority to close down non-banks as they’ve been able to close down banks, the cost to the taxpayer would have been much less,” said Sung Won-Sohn, former chief economist at Wells Fargo & Co. who is now a professor of economics and finance at California State University Channel Islands in Camarillo. “With the authority she’s talking about, the government could take preemptive action.”

You don't leave options like this on the table in a time of crisis.