Green Weeds

The Treasury Department will allow ten banks to repay their TARP money, for a total of $68 billion dollars. I don't have an enormous problem with it, especially considering that the right is whining about socialism and this is more money that the government has given Chrysler or GM combined. But I also agree with Simon Johnson:

The money allows the strongest banks to return federal aid provided at the peak of the fall financial crisis, but few banks have expressed eagerness for the government to end the other forms of support, creating concern that these programs will be habit-forming and more difficult to terminate.

As a result, independent experts warn that the government's relationship with the industry is entering a precarious new phase. As with mortgage giants Fannie Mae and Freddie Mac, the government will no longer share in the banks' profits, but it still stands ready to absorb losses.

"It's good from an individual investor point of view, it's great for the banks, but from a system point of view it's very dangerous," said Simon Johnson, a Massachusetts Institute of Technology professor and former chief economist at the International Monetary Fund.

Banks have been able to raise plenty of capital on the open market, but they still obviously need government support in the form of quick and easy lending and Federal Reserve programs. They want out of TARP to avoid executive compensation rules, period.

So now we have this situation where everyone makes the happy talk about the banks, but unemployment has far outstripped expectations, to the extent that the President and his team came out and repackaged the stimulus yesterday, promising to get money out this summer at a faster pace, saying that they will create or save 600,000 jobs in the next 100 days. Of course, conservatives want to forget the stimulus entirely because they think things are going so well (but NOT because of Obama, you understand... it's a tough needle to thread).

Here on Planet Earth, what we're starting to see is the groundwork for a jobless recovery.

Although the pace of layoffs appears to be subsiding and the overall economy is showing hints of stabilization, most forecasters expect unemployment to continue to increase in coming months and to recede only gradually as recovery takes hold. In this Economic Letter, we evaluate this projection using data on three labor market indicators: worker flows into and out of unemployment; involuntary part-time employment; and temporary layoffs. We pay particular attention to how these indicators compare with data from previous episodes of recession and recovery. Our analysis generally supports projections that labor market weakness will persist, but our findings offer a basis for even greater pessimism about the outlook for the labor market. Specifically, we suggest that the relatively low level of temporary layoffs and high level of involuntary part-time workers make a jobless recovery similar to the one experienced in 1992 a plausible scenario.

And even that recovery is threatened by the next wave of foreclosures caused by mortgage rate recasts and unemployment, and while the banks have successfully blocked any reform of the system, they may live to regret that choice. Because in truth, the economy remains at the brink:

We have both spent large chunks of our lives working on Wall Street, absorbing its ethic and mores. We’re concerned that nothing has really been fixed. We’re doubly concerned that people appear to feel the worst of the storm is over — and in this, they are aided and abetted by a hugely popular and charismatic president and by the fact that the Dow has increased by 35 percent or so since Mr. Obama started to lay out his economic plans in March. [...]

Six months ago, nobody believed that our banking system was well designed, functioning smoothly or properly regulated — so why then are we so desperately anxious to restore that model as the status quo? Nearly every new program emanating these days from the Treasury Department — the Term Asset-Backed Securities Loan Facility, the Public Private Investment Program, the “stress tests” of major banks — appears to have been designed to either paper over or to prop up a system that has clearly failed.

Instead of hauling out the new drywall to cover up the existing studs, let’s seriously consider ripping down the entire structure, dynamiting the foundation and building a new system that rewards taking prudent risks, allocates capital where it is needed, allows all investors to get accurate and timely financial information and increases value to shareholders and creditors.

At the very least, we should rerun the stress tests with the new adverse scenario. And if banks want out from federal government restrictions on pay they need to stop using federal funds in lending programs. We cannot roll back the clock to the go-go 90s and expect everyone to pick up their roles again. That would be a disaster.