bizzXceleration: Performance, Value and Profit

It'll Take More Than Money to Fix This Crisis Browsing through the Style section of yesterday's Post, I happened upon an article about new Washington "power couples" that made reference to one Jeremy Bernard, a Los Angeles fundraiser for President Obama who recently landed the plum job as White House liaison to the National Endowment for the Humanities. White House liaison to the National Endowment for the Humanities?  Let's get this straight: We're up to our necks in the worst global economic crisis since the 1930s, the government is putting trillions of dollars of borrowed money on the line to rescue the financial system and stimulate the economy, tens of trillions of dollars in paper wealth has vaporized, millions of Americans are losing their homes and their jobs, nearly all the top jobs at the Treasury Department are vacant, yet somehow the White House has found the time and the money to hire a liaison to the National Endowment for the Humanities! It's a small point, I realize, and I mean no disrespect either to Mr. Bernard or the humanities. But it highlights what seems to be a glaring problem: There is still way too much business as usual going on in Washington, on Wall Street and in the media.Not so on Main Street. All indications are that in response to the crisis, consumers have embraced a new frugality, paring debt and cutting consumption they know had become excessive. Businesses are moving to cut back on dividends and stock buybacks they can no longer afford, trim frills and reduce prices and capacity to post-bubble realities. Contrast that with the approach to the crisis taken by members of Congress, who as far as I can tell, have changed nothing about how they go about their duties. Same leisurely three-day work week. Same bloated budgets for staff and security. Same unwieldy committees holding the same meaningless hearings. Same partisan posturing and gamesmanship. Same willingness to put narrow special or parochial interests over the national interest. As for Republicans, their stubborn opposition to any increase in government spending in the face of a severe downturn is the economic equivalent of bloodletting. And their determination to paint every initiative of the Obama administration with the broad brush of socialism is the kind of old-fashioned red-baiting that would make Joe McCarthy proud. It's not just Congress, however. Key regulators have also been slow to respond to the unfolding crisis with the kind of urgency the situation demands. The media also deserve some criticism for the way they have recently covered the crisis. The personalizing of policy debates may be great sport during a political campaign, but it can be downright destructive in the middle of a crisis when public and market confidence are so crucial. You'd never know it from the coverage that Treasury secretary Hank Paulson last year almost surely prevented a meltdown of the global financial system. Nor would you imagine from all the negative coverage and commentary that Tim Geithner's now-disqualifying sin is that he took an extra couple of weeks to flush out the details of an innovative scheme to buy up unwanted bank assets and reduce home foreclosures. Too often, the media have accepted uncritically all manner of hyperbole and misinformation peddled by people talking about their trading books, wielding partisan axes or pursuing ideological agendas. While there are plenty of reasons for populist outrage at the behavior of major financial institutions, the titillating focus on bonuses and boondoggles has been way out of proportion. And thanks to the media, much of what now passes for conventional wisdom about the government's response to the crisis amounts to little more than a childish disappointment that officials have been unable to wave a magic wand, throw a couple of hundred billion dollars worth of fairy dust in the air and make the whole thing disappear. What we are facing is the economic equivalent of a war -- a war that caught us by surprise and threatens much of what we have taken for granted. It's a war we can win, but only if we have leaders and opinion makers who commit to difficult sacrifices, a sustained effort and serious changes in the way things are done.

Policy Re-Thinkings, Re-Structurings and Reactions

Let's Put Down the Pitchforks We're angry. We're frustrated. We feel cheated and abused. We're not going to take it anymore. But then again, we don't have much choice, do we? Sure, we can demand that a few more heads roll on Wall Street, or at the Treasury, or that a few hundred million are clawed back from financiers who never deserved it. But the reality is that no matter what we do now, tens of trillions of dollars in wealth have been lost. All that's left is simply an elaborate exercise in settling up the accounts. At the end of the day, the thing to get outraged about is not the $440 million in bonuses at AIG or the $10 million that Citigroup is spending to redesign its shrunken executive suite. These may seem like princely sums, but they are almost insignificant compared with the real outrage: the hundreds of billion dollars of taxpayer funds that have been put at risk to keep AIG and Citi from failing and taking the whole financial system down with them. Let's keep our attention on the elephant rather than the pimples on its behind. First, as I've said in the past, this isn't about fairness. There's nothing remotely fair about using taxpayer money to rescue a free-market financial system from the mistakes of the financiers. But the reality is that we can punish the bankers or we can save the banking system, but we can't do both at the same time. Nor is it fair, as The Great Santelli has declared on CNBC, that homeowners who have paid their bills and have been careful not to take on too much credit are now being asked to provide relief to homeowners who have not. Unfortunately, the price of righteous indignation is a wave of foreclosures, a further decline in home values and billions of dollars of additional loan losses at banks that are already on government life support. Given the financial and economic hits they have already taken, that's a price that most "innocent" homeowners and taxpayers would probably prefer not to pay. During a financial crisis, fairness is a luxury we cannot afford. During the 1930s, bankers and financiers lost everything, but the outcome -- a decade-long depression -- was hardly fair to the ordinary American. The key question is not whether something is fair, but whether it helps get us through this mess faster and at a lower cost. A final point on outrage: We need to save some of it for ourselves. While it was Wall Street that got rich by peddling new ways for Americans to live beyond their means, the decision to do so was ours. It was we who ran up the credit card bills, we who drew down the equity in our homes and we who refused to tax ourselves for the government services we demanded. Wall Street bankers may have been the pushers, but it was we Americans who became addicted to the easy credit.

Timothy Geithner: My Plan for Bad Bank Assets The American economy and much of the world now face extraordinary challenges, and confronting these challenges will continue to require extraordinary actions. No crisis like this has a simple or single cause, but as a nation we borrowed too much and let our financial system take on irresponsible levels of risk. Those decisions have caused enormous suffering, and much of the damage has fallen on ordinary Americans and small-business owners who were careful and responsible. This is fundamentally unfair, and Americans are justifiably angry and frustrated. The depth of public anger and the gravity of this crisis require that every policy we take be held to the most serious test: whether it gets our financial system back to the business of providing credit to working families and viable businesses, and helps prevent future crises. Over the past six weeks we have put in place a series of financial initiatives, alongside the Recovery and Reinvestment Program, to help lay the financial foundation for economic recovery. We launched a broad program to stabilize the housing market by encouraging lower mortgage rates and making it easier for millions to refinance and avoid foreclosure. We established a new capital program to provide banks with a safeguard against a deeper recession. By providing confidence that banks will have a sufficient level of capital even if the outlook is worse than expected, more credit will be available to the economy at lower interest rates today -- making it less likely that the more negative economy they fear will take place. However, the financial system as a whole is still working against recovery. Many banks, still burdened by bad lending decisions, are holding back on providing credit. Market prices for many assets held by financial institutions -- so-called legacy assets -- are either uncertain or depressed. With these pressures at work on bank balance sheets, credit remains a scarce commodity, and credit that is available carries a high cost for borrowers. Today, we are announcing another critical piece of our plan to increase the flow of credit and expand liquidity. Our new Public-Private Investment Program will set up funds to provide a market for the legacy loans and securities that currently burden the financial system. The Public-Private Investment Program will purchase real-estate related loans from banks and securities from the broader markets. Banks will have the ability to sell pools of loans to dedicated funds, and investors will compete to have the ability to participate in those funds and take advantage of the financing provided by the government. The funds established under this program will have three essential design features. First, they will use government resources in the form of capital from the Treasury, and financing from the FDIC and Federal Reserve, to mobilize capital from private investors. Second, the Public-Private Investment Program will ensure that private-sector participants share the risks alongside the taxpayer, and that the taxpayer shares in the profits from these investments. These funds will be open to investors of all types, such as pension funds, so that a broad range of Americans can participate. Third, private-sector purchasers will establish the value of the loans and securities purchased under the program, which will protect the government from overpaying for these assets. This requires those in the private sector to remember that government assistance is a privilege, not a right. When financial institutions come to us for direct financial assistance, our government has a responsibility to ensure these funds are deployed to expand the flow of credit to the economy, not to enrich executives or shareholders. These provisions need to be designed and applied in a way that does not deter the participation by the private sector in generally available programs to stabilize the housing markets, jump-start the credit markets, and rid banks of legacy assets.

• Treasury Unveils Toxic-Asset Plan
• Watch Live Video: Q&A With Geithner
• Geithner Seeks Powers to Wind Down Firms Like AIG

Asset Plan Raises Many Questions Though the Obama administration released new details Monday about its plan to buy toxic assets, critical questions remain unanswered, and they likely will not be cleared up until the plan begins operation. Chief among them were whether investors, through an auction process run by the Federal Deposit Insurance Corp., would offer high-enough bids to entice bankers to sell illiquid assets and whether federal regulators would force them to participate if they balked at selling. FDIC Chairman Sheila Bair conceded that possibility, acknowledging nothing could guarantee the process would produce a good deal for the investor, the bank and the government. "There is always that risk," she said in a conference call with reporters. "Markets will do what markets will do, but I think this structure has a better chance than any that I've seen to provide that magic price where buyer and seller are willing to meet. But we won't find out until we get it running and see what happens." When asked if regulators might push bankers to accept a price offered through the auction process, Bair responded that it would be a "consultative process with supervisors." Industry observers argued that the banking agencies would penalize banks that did not take the opportunity to shed their most troublesome assets. "If the banks refuse to sell, I think you'll see an increased pressure on the part of the regulators and an increased Camels rating going on to the watch list," said Thomas Barrack Jr., the founder, chairman and chief executive of Colony Capital. "The regulators will have no other alternative to start shutting down more banks." Mark Zandi, chief economist and co-founder of Moody's Economy.com Inc., said pressure from the Treasury Department and the results of "stress tests" on the banks could force many to participate. The Treasury split its program to address troubled assets into two parts. Under one, the FDIC would host auctions designed to let banks sell pools of residential and commercial real estate loans. Under the other, the Federal Reserve would accept legacy securities as collateral as part of its Term Asset-Backed Securities Facility. The Treasury plans to partner with up to five asset managers to help it manage the extended TALF program, which will now accept lower-rated securities. The department would use up to $100 billion from the Troubled Asset Relief Program to leverage $500 billion of toxic asset purchases. Treasury and Fed officials said the program could be expanded to reach $1 trillion. It was unclear when either program would be up and running. The FDIC said it plans to release more details on its auction process shortly and would put it out for public comment.

Optimism Over Despair It fills me with a sense of despair that Paul Krugman is now "filled with a sense of despair." Gee, and I was feeling rather encouraged by yesterday's developments. If nothing else, it was certainly a good sign that the conversation has turned from AIG bonuses to the question of how to revive the global financial system. And a nearly 500-point rally on Wall Street led by financial shares certainly suggests some improvement in investor confidence. More to the point, the plan looks to me like it has a good chance of bringing significant amounts of private capital back into the financial system and relieving banks of some of their worst assets. On first blush, the Geithner plan looks rather complicated, but its general design is rather simple: The government will go in as partner with private investors in newly created investment vehicles that will compete to buy up loans and securities backed by loans that banks want to sell in order to strengthen their balance sheets. As with most investment funds, this public and private equity or risk capital will be supplemented with additional funds that will be borrowed from Treasury, the Federal Reserve or from private investors who will receive a government guarantee that their loan will be repaid. If the investments wind up making money, the profits will be split with the government in the same proportion as the equity that was put in. If the funds lose money, the initial losses -- roughly the first 15 cents on the dollar -- will be borne in the same proportion by the government and the private investors. Any losses beyond that will be borne by the government. In the meantime, the banks will be able to strengthen their balance sheets in ways that will allow them to attract new private capital from investors who no longer will worry about the bad loans on the banks' books. They will also have the cash from the asset sales with which to make new loans. Most importantly, by reviving the secondary market for the loans and securities backed by packages of loans -- the so-called "shadow banking system" -- the plan could revive the mechanism that in recent years has been the source of capital for half the loans to American businesses and households. (That's one reason why bank nationalization might work in a country such as Sweden a decade ago, but wouldn't work as well here.) The blogosphere was full of Krugman-like criticism of the Geithner plan yesterday, with some complaining that it would be a windfall for hedge funds and other private investors and others arguing that it would fail to attract private capital. It's hard to see how both could be true. There's no denying the fact that the balance of risk and reward for these investment vehicles are asymmetric -- more of the downside risk is assumed by the government, while more of the upside reward will go to the private investors. But some sort of asymmetry was inevitable for any plan that tried to lure private investors at a time when investors were refusing to participate with the usual risk-and-reward ratios. One can quibble that the proposed deals are too sweet or not sweet enough, but I can assure you that the folks at Treasury, having consulted widely with potential investors, have a better feel for those details than even the most sagacious newspaper columnists. The larger point, however, is that the government has different goals than private investors. Investors want to make as much money as they can while taking the least risk. The government wants to revive the financial system and an economy in a way that winds up costing taxpayers the least amount of money. The asymmetries reflect those different goals.

Dissecting Bank Plan for a Way to Profit Up and down Wall Street, bankers and traders sharpened their pencils on Tuesday as they began the complex financial calculus of the latest bank rescue plan. Their goal: to find ways to profit from it. In skyscrapers across Manhattan, banking executives assessed how best to use the new Treasury proposal to sell billions of dollars of their troubled assets. Traders at giant investment houses and small hedge funds debated whether to buy them. And on a day when the Treasury secretary, Timothy F. Geithner, said he was seeking government authority to regulate or take control of nonbank financial institutions like insurance companies, insurance executives wondered whether they might use the program to ease their industry’s financial stress. “Even though they are called toxic assets, some of them are not toxic, and those are the ones that we are going to be ferreting out,” said Sherry Reeser, a spokeswoman for the California State Teachers’ Retirement System, which sees a buying opportunity in the so-called public-private investment program. But no one on or off Wall Street seemed any closer to answering the fundamental question hanging over these investments: What is this stuff really worth?  Nor was there any consensus about an even more sobering question that confronts not only the financial industry but ordinary Americans: Will this be the plan that finally works?  “It’s a wait-and-see attitude,” said Paul Graham, chief actuary of the American Council of Life Insurers. The proposal, which was announced officially on Monday, has provoked many responses and questions. Can banks that received government bailouts use taxpayer money to bid on toxic assets, in the hope of making a profit? Would that be bad, given that the point of the exercise is to stir up a bit of greed and animal spirits, the lack of which has been holding the economy back? Can banks sell some assets and then use the proceeds, leveraged by generous government financing, to buy more of the same? Might investment houses be tempted to overpay, if doing so buoys the value of their own investments? In the end, it will be the taxpayer who will be largely footing the bill. For the Obama administration, the challenge is to strike a balance between the potentially competing interests of investors and taxpayers. Some wonder if the proposal tips too far in favor of investors. Internet blogs were full of economists scratching their heads over how to game the plan and come out ahead of the government.

CITI, BOFA BUYING BACK LAUNDERED LOANS AT LOWER RATES As Treasury Secretary Tim Geithner orchestrated a plan to help the nation's largest banks purge themselves of toxic mortgage assets, Citigroup and Bank of America have been aggressively scooping up those same securities in the secondary market, sources told The Post. Both Citi and BofA each have received $45 billion in federal rescue cash meant to help prop up the economy and jumpstart the housing market. But the banks' purchase of so-called AAA-rated mortgage-backed securities, including some that use alt-A and option ARM as collateral, is raising eyebrows among even the most seasoned traders. Alt-A and option ARM loans have widely been seen as the next mortgage type to see increases in defaults.One Wall Street trader told The Post that what's been most puzzling about the purchases is how aggressive both banks have been in their buying, sometimes paying higher prices than competing bidders are willing to pay. Recently, securities rated AAA have changed hands for roughly 30 cents on the dollar, and most of the buyers have been hedge funds acting opportunistically on a bet that prices will rise over time. However, sources said Citi and BofA have trumped those bids. The secondary market represents a key cog in the mortgage market, and serves as a platform where mortgage originators can offload mortgages in bulk that have been converted into bonds. Yields on such securities can be as high as 22 percent, one trader noted. BofA said its purchases of secondary-mortgage paper are part of its plans to breathe life back into the moribund securitization market.

Rolling Stone: “The Big Takeover” — AIG Bailout as Political Revolution by Wall Street If you have not done so, read MATT TAIBBI’S excellent piece in Rolling Stone on the political implications of the bailout: The Big Takeover . Taibbi has done a very thorough job of research on this piece.  For example, he illustrates some of the bizzare legal protections given the Fed over the years, protections that make the central bank immune from congressional oversight:  Article provides excellent overview of AIG scandal and political angles. BTW, I am hearing that Rahm Emanuel is bought and sold by Goldman Sachs.  More confirmation that we need to change the caption on the money to read “In Goldman Sachs We Trust,” a la Galbraith, of course.

Dark musings, 2009-03-24 Unfortunately, I have a darker temperament, a spirit less generous and optimistic than Mark’s. I am filled with despair, not because what we are doing cannot “work”, but because it is too unjust. This is not my country. The news of today is the Geithner plan. I think this plan might work very well in terms of repairing bank balance sheets. Of course the whole notion of repairing bank balance sheet is a lie and misdirection. The balance sheets we should want to see repaired are household balance sheets. Banks have failed us profoundly. We want them reorganized, not repaired. A world in which the banks are all fixed but households are still broken is worse than what we have right now. Too-big-to-fail banks restored to health are too-big-to-fail banks restored to power. The idea that fixing legacy banks is prerequisite to fixing the broad economy is a lie perpetrated by legacy bankers. I think that critics of the Geithner plan are missing some of its tactical brilliance. My guess is that behind the scenes, Geithner has arranged a kind of J.P. Morgan moment. You know the story. During the Panic of 1907, J.P. Morgan locked a bunch of bankers in a room and insisted they lend to stave a panic. We’ve already seen one twisted parody of this event, when Henry Paulson locked a bunch of bankers in a room and insisted they borrow money from the Treasury. This second one is more clever. I don’t think the scandal of the Geithner plan is going to turn out to be the subsidy to well-connected investors embedded in the non-recourse loan put option. On the contrary, I think that Treasury has already lined up participants for the “Legacy Loans Public-Private Investment Fund” and persuaded them to offer prices so high that despite the put, investors will expect to take a major loss. My little conspiracy theory is that the Blackrocks and PIMCOs of the world, the asset managers who do well by “shaking hands with the government“, will agree to take a hit on relatively small investments in order first to help make banks smell solvent, and then to compel and provide “good optics” for a maximal transfer from government to key financial institutions.

Bonus Anger Will Linger Anger over executive pay and bonuses could poison labor relations for years, Ignatius argues in today's video. Is he right? How else do you expect the recession to change the long term business landscape?

Where’s the Plan, Wall Street? FOR the last several months, Americans have looked to Washington to lead them. But where’s the leadership on Wall Street? There is an enormous opportunity for a C.E.O. to come forward with a plan to reform the financial system and pledge a change from business as usual. Jamie Dimon, JPMorgan Chase’s chief executive, has been the most outspoken of his peers during the crisis — and has done an admirable job addressing the issues — but he has been more focused on helping instill confidence in the economy and the health of his own firm. John Mack, the chief executive of Morgan Stanley, has shown glimpses of public leadership, at one point apologizing for the crisis by saying, “We are sorry for it.” But the public could particularly benefit today from a forceful voice of reason and change within the industry, proposing how to remake the world of finance in a sensible way, driven not by populism but by practicality and a sense of fairness. It’s worth noting that most Wall Street C.E.O.’s are being advised by their legal and public relations teams to keep their heads down or risk provoking more public outrage. But there is the flip side to that coin: reasoned leadership may generate a reasonable response, helping the industry pre-empt what it fears most — additional government regulation. So in that spirit, here’s a five-point plan to refashion Wall Street. A plan that would be best sold by Wall Street itself.

Geithner to Propose Vast Expansion Of U.S. Oversight of Financial System Treasury Secretary Timothy F. Geithner plans to propose today a sweeping expansion of federal authority over the financial system, breaking from an era in which the government stood back from financial markets and allowed participants to decide how much risk to take in the pursuit of profit. The Obama administration's plan, described by several sources, would extend federal regulation for the first time to all trading in financial derivatives and to companies including large hedge funds and major insurers such as American International Group. The administration also will seek to impose uniform standards on all large financial firms, including banks, an unprecedented step that would place significant limits on the scope and risk of their activities. Most of these initiatives would require legislation. Geithner plans to make the case for the regulatory reform agenda in testimony before Congress this morning, and he is expected to introduce proposals to regulate the largest financial firms. In coming months, the administration plans to detail its strategy in three other areas: protecting consumers, eliminating flaws in existing regulations and enhancing international coordination. The testimony will not call for any existing federal agencies to be eliminated or combined, according to the sources, who spoke on condition of anonymity. The plan focuses on setting standards first, leaving for later any reshaping of the government's administrative structure. The nation's financial regulations are largely an accumulation of responses to financial crises. Federal bank regulation was a product of the Civil War. The Federal Reserve was created early in the 20th century to mitigate a long series of monetary crises. The Great Depression delivered deposit insurance and a federally sponsored mortgage market. In the midst of a modern economic upheaval, the Obama administration is pitching the most significant regulatory expansion since that time. An administration official said the goal is to set new rules of the road to restore faith in the financial system. In essence, the plan is a rebuke of raw capitalism and a reassertion that regulation is critical to the healthy function of financial markets and the steady flow of money to borrowers. The government also plans to push companies to pay employees based on their long-term performance, curtailing big paydays for short-term victories. Long-simmering anger about Wall Street pay practices erupted last week when the Obama administration disclosed that AIG had paid $165 million in bonuses to employees of its most troubled division, despite losing so much money that the government stepped in with more than $170 billion in emergency aid.The administration's signature proposal is to vest a single federal agency with the power to police risk across the entire financial system. The agency would regulate the largest financial firms, including hedge funds and insurers not currently subject to federal regulation. It also would monitor financial markets for emergent dangers.

How to fix the global economy Globalization -- and the integration and rise of the world's developing economies -- have been taking place at a breakneck pace. Who would have believed 20 years ago that China would become the world's third-largest economy in 2008? Or that so many jobs and, in some cases, whole industries would essentially be shipped from the developed world to countries with low labor costs? Meanwhile, the longer-term solutions have yet to kick in:

• Developing economies have been slow to let their citizens spend their growing wealth. Government decisions to provide only a pittance, if any, of a pension at retirement, restrictions on land rights that prevent farmers from selling their land, and moves to market-based, for-fee education and health care systems have all depressed spending. If you know the future is completely up to you, you put as much as you can under the mattress.

• Developed economies have been slow and, in some cases, actively delusional about addressing the limits of their wealth. Japan, the European Union countries and the United States all offer unsustainably high retirement and health care benefits, for example. The Bush administration's calls to expand the percentage of Americans who own their own homes in a period of stagnant family incomes made political but not financial sense.

• Developing economies have remained wedded to controlled currency exchange rates that slowed the appreciation of their currencies against those of their trading partners. The lessons of the Asian currency crisis of 1997, which nearly bankrupted export-based economies that hadn't put enough in the bank, led to an almost obsessive drive to build up reserves.

For all these reasons and more, the world came to rely more and more on short-term solutions. And as the period that short-term solutions were called upon to fix stretched out further and further, it put increasing strain on the short-term system itself. But to keep the short-term solution working, to keep the global imbalances circulating, that's the proposition that both deficit and surplus nations had to embrace. And they did. The labs of Wall Street turned out the products. First, securities backed by pools of mortgages and commercial loans and buyout loans and credit card debt that paid higher yields than plain old Treasurys but that were supposedly safer than individual mortgages, etc., because they were pooled. The game was to create a new world of AAA-rated investments that paid more than the traditional AAA investments exactly at a time when the supply of actual AAA-rated investments was shrinking as companies and governments piled on debt. It's clear, of course, why the deficit countries and the financial factories that churned out this paper wanted to believe. The alternatives were too hard or too painful -- the long-term mechanisms I've mentioned above inflict economic pain and require short-term sacrifice. What's more intriguing is why the surplus countries bought into this -- well, let's call it what it was -- global Ponzi scheme. It wasn't because the financial experts in these countries were stupid. Many of them clearly saw the scam for what it was. But the surplus countries had as much incentive to believe in the short-term solution as the deficit countries did. Once you hold $500 billion in Treasurys, you aren't inclined to say, "Hey, these are not as safe as I thought." When you need higher yields to feed an underfunded state pension plan, you're not inclined to say, "You know these aren't really suitable for a pension fund."  And so, as the risks grew, more-extravagant instruments were needed to keep the money circulating around the globe. And then, one day, the bust in the U.S. housing market, what could have been a relatively small event in a universe with less leverage and less riding on  nsustainable guarantees, showed that the system was built on smoke and mirrors. And the money stopped circulating. And the global economy ground slower and slower in a devastating credit crunch. If this is the disease, what's the cure? I think the medicine comes in three parts that are based on a recognition that the huge global challenge of recirculating money from surplus to deficit nations isn't going away soon. And what happens if we don't address these underlying problems? Down the road, five years or seven or 10, we're going to replay this crisis. The global imbalances that brought it into being aren't going away by themselves. Certainly not very quickly.

Bailout Scorecard: The End of the Beginning Breathe a sigh of relief: More than six months after the financial crisis erupted, a complete bailout regime is finally in place.The bank rescue plan finally unveiled by Treasury Secretary Tim Geithner is the last major piece of a vast bailout scheme that's been evolving since last September, when Lehman Brothers failed and AIG and Merrill Lynch almost did. Having a full plan in place doesn't mean it will work. But regulators at the White House, Treasury, and Federal Reserve can now transition from designing the biggest financial bailout in 70 years – which could ultimately cost more than $2 trillion - to executing it.If you've lost track of what the government is actually doing, you get a pass. The bailout efforts have developed in fits and starts, from TARP to TALF to a bunch of other arcane-sounding programs. (See Treasury’s official list.) Some have been scrapped before they even got started. Others have been rolled out quietly, then expanded to become major parts of the relief effort. And the bailouts don’t include stimulus spending, tax cuts, or monetary-policy maneuvers by the Federal Reserve.The Obama administration now calls its various bailout efforts the Financial Stability Plan, and it’s developing a Web site to explain it all. Meanwhile, here's a quick scorecard to help track the government’s biggest moves, how much it's costing, and what the prospects for success seem to be:

Political Economy of Policy (Prior Posts)

First Things: Financial Crisis, Economy and Barry Otto, Furst von Bismarch, was not only a great statesman but an experienced, wise and witty politician; author of the "Sausage Factory" epigram we keep re-using. He had another, actually several but this one sticks, that when a crisis goes by grab its' coattails and ride for all it's worth. In this case we're facing multiple inter-lacing policy crisis that have been accumulating for decades, which nobody was willing to tackle to the can kept getting kicked in the ditch until it put itself back on the road and, worse, we actually knew what to do about all the cans. The thing about a crisis is that it not only represents danger but opportunity since it's likely that the will to change and do what is NOW clearly necessary can be mustered instead of continuing in denials. We're so much in that position that many on the inside of things are actually excited to finally get a chance to do what they've known needed doing for a long time. So much so that my alternative title was Economic Crisis=Opportunity, Danger and Change. While we're in the midst of the worst financial crisis since the '30s and the most serious economic downturn since the early '70s the cartoon is still more black humor than reality; but if we don't seize this opportunity it'll be more truth than anything. Fortunately not only is Barry picking the best economic team since Bretton Woods or the Marshall Plan with outstanding people in the right jobs (Hit the Decks aRunnin...Git 'er Done Barry) but he and they are moving with speed, urgency, accuracy and skill. He's already made more progress that's the right kind than the last three Presidents did in their first 18 months. Amazing and startling but to establish why we're going to have to take rather deep dive on the subject of economic policy by poking at the nature of business cycles and fiscal stimulus.

To Boldly Go Where We Must: Speech, Budget and Dr. Noes Judging from the readership indicators we can move on to the next discussions but judging from the cartoons, talking heads and agitated feedback from my network we need to stay with the "Political Economy" of the Stimulus/Budget/Rescue efforts, so we will. Just in case you were on vacation last week it was one of the most momentous in post-war American history ioho - particularly for the speed, size and complexities of what was done. Mo saw the signing of a giant stimulus package, Tu a major national "suck-it-up" address that's largely gotten plaudits from almost all sides with the exception of diehard Rips, We saw the Phase 2 announcement of TARP II and Th the tabling of the most ambitious budget proposals we've seen in a very long time. Not to mention Chairman Bernanke's testimony that "yes a recovery was possible if everything went right AND we repaired the financial system". Any one of those things, or actually a subset of line items, would have been as much major news as we've been used to getting in a month in the last 8-12 years. Barry's striking while the iron is hot indeed.

Back in the US: Economic Realities vs Partisan Posturings We're going to circle back to the US and take up the state of the economy, economic policy, policy vs. politics and partisan political posturings and try and braid them together into a single rope of investigation. At the same time we are NOT leaving the topic of the state and outlook of the world because, as we argued in the first foreign affairs post in this series the US's role in maintaining and re-developing a new international system is critical and indispensable. And central to that role is the success of economic policy without which both the US and the world will face severe difficulties. In the readings we cover a lot of ground, as usual admittedly, starting with a survey of the state of the economy and real nature of proposed economic policy instead of what the headlines, pundits and partisans are telling you. If you read nothing else click thru and download Paul Kasriel's two essays on what did work in fact in the Great Depression (The Great Depression – Just the Facts, Ma’am) and on what role savings and investment will play in future growth (Paradox Squared). Then we shift to what the real challeng is - IMPLEMENTATION ! Then we segue to the partisan catfights where old shibboleths of the '80s are being revived to counter these policies when the facts on the ground  have changed ("when the facts change I change my mind. what do you do ?"). Finally we finish up with some readings on re-imagining what the new world could/should look and why a return to fundamental values revived in new clothes are essential to making this all work ! To summarize our main points however we'd say: 1) the economic situation is very serious but fixable and we have strong historical evidence, 2) the biggest challenges are implementation AND laying future foundations. On the latter the Administration is doing many right things on the former it's early to say. However, 3) partisanship is proving to be a poisonous legacy, 4) the American people still haven't grasped the Administration's direction at a fundamental (gut) level and 5) the biggest danger is the knife-edge balances between impatience for what will take time, effort and perseverance against the all to real risks of backlashes, anger and a radicalization of American politics. Then all bets are off. We take our socio-political stabilities for granted but what happens if they aren't a self-renewing gift from past generations ? Then we're in for the same kinds of troubles that are threatening other nations !