"I don't mean bottomless pit literally... of course... But bottomless in terms of likely federal monies. We're going to put in 2-3 trillion into TARP-style programs by the end of the day, and Citi and BoA are still going to fail.

That kind of money, made available, to a new group of financial professionals might be put to better use."

I guess I don't really seek a response, because we are going in circles now. We simply disagree. I just can't imagine new, wonder banks, immediately stepping in and replacing what we have. You, IMHO, are playing with fire by advocating vaporizing these institutions.

WRT Steve - he is certainly capable of defending himself. However, I have found his analysis and views pretty much accurate and on point. The problem with these things is we never know until two to five years after the fact who is correct. But I will hold steadfast: this recession is severe, and 82-like - but the notion that it is the end of the world and the predicate for massive govt intervention as currently advocated is just plain stupid, silly and wrong. We are all prisoners of our experience. But I lived that 82 recession, front and center. Get a clue, people. Its just a recession. Not the end of the world. And the govt has no clue how to do better.

This govt as salvation argument is just politics. Dangerous politics. Sorry, I'm shoulder to shoulder with Verdon here.

Yes, I update my views as information comes in. My point is that you and I had the same information back in September. I saw the situation as grim, you saw it as mild. Regardless of where we end up, and my assessment is that we are looking at a 1974-1982 period. Severe recession, weak messy "recovery," second severe recession, with a fiscal disaster in between -- your assessment has moved closer to mine, rather than mine to yours.

That's all I am saying... and somehow I called it with the same info you had eh?

Now about CBO and the stimulus... you'll note... please... that I have never particularly argued for the stimulus. I have just argued that people who argue against it on the fantasy notion that our economy will recovery quickly are misguided. I also believe that we're making a mountain out of a molehill (relatively speaking) of pork in the bill. You actually, lol, brought up the $355 MILLION in family planning money. You can't really believe that is a reason to vote against the bill. That is, int he scheme of things, genuine chump change.

So, in short... I believe the economy is in worse shape than stimulus critics argue and I believe they are overstating the pork problem in the bill as well. That said, I don't know that the stimulus package will help because I agree that there is a real fiscal problem coming our way. But on the other hand, even though it might not help, I think that it is better to err on the side of hedging our bets and give it a shot.

--BF

Re: Steve... when the meltdown began, he was writing about how mild the recession was. Then when the numbers got worse, he said it was a median recession. Now he's saying, a bad recession like 1981... He's been consistently behind the curve, and remains so, I believe. I could well be wrong... but then again, my assessment has not been proven wrong twice already.

Yes Bernard, to paraphrase Lord Keynes, when I get new data that suggests my views are wrong I change my views, what do you do Bernard?

As for being behind the curve I disagree, as soon as new data becomes available I think I've been pretty good at updating my beliefs. Funny, not too long ago I was getting it from the other side that I'm being too pessimistic. I take it, based on your comments and those on the right, that I'm doing it right.

Oh and after a quick reveiw Bernard I'm calling your statement above...false. I did note about a month ago that the recession was looking like it would be typical (median) to mild (i.e. based on unemployment--typical, based on outpu--mild) based on the data we had at the time. With new data I noted it was looking more like 1981 although not quite as bad. That would make it a bad recession, but not the hair on fire wet your pants kind of recession you are arguing is going to result.

I agree with all of that. I'd rather see a $500 billion package that was serious. But I'd also like to go on a double-date with Scarlett Johansson and Megan Fox... but that isn't an option right now.

Well with $500 billion in your pocket I'm sure you could get Megan Fox's attention.

I'd rather have nothing than the current stimulus plans. Why? I don't think the recession is going to be as bad as everyone states. It wont be "normal", but it isn't armaggedon. Second, we have very, very serious fiscal imbalances that make this recession look like a joke. Screwing up now and blowing money we can't afford to spend is going to make dealing with those imbalances even harder.

The choices are, unfortunately, (a) do nothing; (b) pass a decent $500 billion spending/tax cuts package with an additional $300 billion of pork; (c) pass a pure tax-cuts package. That is all that is on the table. I vote (b).

I vote (a). I've sketched out my reasons. You've only given me vague references about how this is going to be really, really bad. Even the CBO doesn't hold that view. And careful, you seem to agree with them on their statisical/analytical assesments of the stimulus, but are you really going to reject their similar work on the recession? Could look like cherry picking.

Let me also note that pork is not all bad. Some pork is stuff that people would like, but don't really need. But it is rarely pure waste. Even the "bridge to nowhere" was not just "waste" -- it might not have been cost-effective or been wise, but it would have produced benefits for the locals. So, the pork thing does not get me as worked up as it does others.

Implicit in this is that the money would have been totally fallow if not spent. I don't buy that argument for a second. That money and those resources could have been put to much better use than building a bridge to nowhere.

no matter how much Steve wants to think this is just your usual run-of-the-mill business cycle recession.

Really, so your claim is that 1981 was "run of the mill", really?

I don't mean bottomless pit literally... of course... But bottomless in terms of likely federal monies. We're going to put in 2-3 trillion into TARP-style programs by the end of the day, and Citi and BoA are still going to fail.

That kind of money, made available, to a new group of financial professionals might be put to better use.

Re: Steve... when the meltdown began, he was writing about how mild the recession was. Then when the numbers got worse, he said it was a median recession. Now he's saying, a bad recession like 1981... He's been consistently behind the curve, and remains so, I believe. I could well be wrong... but then again, my assessment has not been proven wrong twice already.

Re: Obama... I think it is likely (possible?) that if Obama were king, he might draft a reasonably serious package. But in the end you need to get it through the House and Senate, and each member has to be able to go back to his distract and justify the stimulus by pointing to some local benefit. I wish it wasn't the case, but it is. So either, you believe we need a stimulus package, or you don't. And if you do, you have to accept that it won't be a perfect package because our system does not allow for perfect laws.

I appreciate the argument of principled purists like Steve on this issue. But unfortunately, in the real world, Steve's intelligent concern about the stimulus is being used as a cover by partisan hacks who want the package to fail, not because they think we don't need it, but because they want to give Obama a political defeat.

"I think what we have is a set of mega-banks that are structurally compromised and will make any money put into them less effective than if the money had gone to a start-up."

Wow. Start-up is really tough. B of A was a very good retail bank, but uk-fayed up-yaed in buying Countrywide and Merrill. But I wouldn't throw out the best retail bank in the country just to make a point. As an ex-banker, I'd advise good luck with loan origination on a start up basis in the next 24 months.

"I think we're going to see that there is essentially a bottomless pit of liabilities so that even at fire-sale prices, you're still paying too much for assets."

C'mon. That is wrong by definition. There is no bottomless pit. The real question is whether bailout fresh money is sufficient to reinstate adequate capital ratios when the bad loans are properly valued. And so that is where I'd focus my analysis and capital. I think you will find that "bottomless" is hyperbole.

"I promise you that every dollar to goes to citi will ultimately be eaten up by their toxic assets and none of it will go back to lending."

See above. You "promise" that? Do you have the bad loan balance estimate handy? I confess I don't. But that simply sounds like gloom and doom.

"Pay off depositors through FDIC. Invest in new lender without buried time bombs. Let the old banks disappear."

Again - and please, I'm a brutal, Milton Friedman, free market guy - but this seems to be hari - kari. A start from scratch lending industry just seems a bridge too far.

"no matter how much Steve wants to think this is just your usual run-of-the-mill business cycle recession."

The previous points are genuinely debatable. However, I have to vigorously disagree here. First, I don't think he has said its "run of the mill." I believe he said 1981-1982 is his current analog. And that's pretty severe. (I happen to agree, having lived through that one in my first job - and lived through it in the steel industry, of all things. I know a tough recession, first hand. I also know that analogies to The Great Depression and Armageddon are just simply absurd on their face.)

Verdon also makes an observation that I think is crucial. If Obama was really a change agent, and if things were really that bad, the spending package would be focused and sober, commensurate with the gravity problem. Its not. Its a mismash of porky crappola.

I've seen this movie before. Bad ending.

http://cboblog.cbo.gov/?p=205

CBO estimates that the Senate legislation would raise output by between 1.4 percent and 4.1 percent by the fourth quarter of 2009; by between 1.2 percent and 3.6 percent by the fourth quarter of 2010; and by between 0.4 percent and 1.2 percent by the fourth quarter of 2011. CBO estimates that the legislation would raise employment by 0.9 million to 2.5 million at the end of 2009; 1.3 million to 3.9 million at the end of 2010; and 0.6 million to 1.9 million at the end of 2011.

JKB: Yes, as usual Lowry and the Corner have found the unbiased truth. Hurrah!

So your contention is that the CBO is biased?

How about a quote directly from the blog of the Director of the Congressional Budget Office?

Including the effects of both crowding out of private investment (which would reduce output in the long run) and possibly productive government investment (which could increase output), CBO estimates that by 2019 the Senate legislation would reduce GDP by 0.1 percent to 0.3 percent on net.

Is the Director biased? NRO and the Wash Times were only reporting the facts as issued by the office tasked with assessing the impact of legislation.

I promise you that every dollar to goes to citi will ultimately be eaten up by their toxic assets and none of it will go back to lending.

Pay off depositors through FDIC. Invest in new lender without buried timebombs. Let the old banks disappear.

It won't be pretty. But we're way beyond salvaging pretty at this point-- no matter how much Steve wants to think this is just your usual run-of-the-mill business cycle recession.

You don't want "the banks" to "collapse." That's the road to ruin; the nightmare of any central banker. Depression. What you want is a coordinated restructuring.

There is a raging debate as to how to restructure the banks. In a classic workout, new equity comes in and flushes out the old owners who presided over the problem. Further, that flushes out the options of the bad managers. Its the classic capital markets way. The new money gets the spoils, the old money takes the hit.

Alternatively, we have this "bad bank" concept. In this way, the operational distraction of troubled assets goes away, being removed from the institution. (And believe me, I was in a bank at one point in my career. Workout is the worst distraction you can imagine.) However, the old equity does not pay the price.

That is the debate that needs to be had.