Defunct Economics

I'm Back

2012-01-22T20:17:00.000-08:00

Hello Friends,

At this point it is unlikely that anyway still reads this blog, but because I hope people do read in the future, this is my "I'm Back" post. After a long tenure at OFA as a part of President Obama's team, I am back in the real World.

My hope is that from here on out this will be a place where I talk mostly about education and economic policy, but with a little bit of everything else mixed in.

Here is to a free and open internet where ideas can be exchanged quickly and little cost for the betterment of society.

Thanks for reading,

Econowonk

Apple and The Fight for American Jobs

2012-01-22T18:52:00.000-08:00

When famously asked "What kept them up at night?" President George Bush responded an attack on the homeland, and Chinese President Hu Jintao said creating 25 million jobs a year.

The answers of those two President's reflect the fundamental problem we face as a nation. That while we as a country and our policy makers are focused on 25 different issues and non-issues while China and many other nations have a laser focus on job creation.

The article that is the impetuous for this post is called, "How the US Lost Out on the iPhone Work."

I highly recommend the article. In the days to come I will highlight some of the potential policy solutions, but the bottom line for today is that at this moment any good ideas that could come of such a case study are two disparate to attract tenable political support in an election year.

Michigan Republican Attacks Heat Up

2009-07-20T08:05:00.001-07:00

From: "Mike Bishop"
Date: Fri, 17 Jul 2009 20:23:24 -0400
To: XXXXXXXXX
Subject: FW: URGENT ACTION NEEDED ON HEALTH CARE

Ladies and Gentlemen,

It's time for all of us to stand up and be heard! Congress and the Obama machine are working swiftly to socialize our healthcare system and blow us away with biggest tax increase in history. Call your friends, call your neighbors and get involved NOW! I've attached an article below, by Dick Morris, which frames the issue and specifies who we need to contact. This is our country and it's time to let them know!

God Bless,

Mike Bishop
Michigan Senate Majority Leader

URGENT ACTION NEEDED ON HEALTH CARE

By DICK MORRIS & EILEEN MCGANN

Published on DickMorris.com on July 17, 2009

In two weeks, Obama's health care plan is likely to become law, ending medicine as we know it in the United States! Unless we can stop him, our own personal access to medical care will be attenuated (no matter if we can pay for it ourselves) and we will all be subject to bureaucratic rationing.

His plan would:

In Catastrophe, we enumerate the disaster of the Canadian health care system. A cancer death rate 16% higher than in the US. A colon cancer rate 25% higher due to waits for colonoscopies and a death rate once afflicted that is 41% as opposed to 32% in the US. An eight week wait for cancer radiation therapy.

We are organizing a media campaign to target swing state Senators to delay or kill the Obama bill. We will concentrate on:

Montana - Baucus and Tester
North Dakota - Dorgan and Conrad
South Dakota - Johnson
Nebraska - Nelson
Arkansas - Pryor and Lincoln
Louisiana - Landrieu
North Carolina - Hagan
Indiana - Bayh
Connecticut - Lieberman
Maine - Snow and Collins

The text of the ad will be:

"How can Obama care for fifty million new people without more doctors? By cutting access to care for the elderly. End Medicare as we know it. The government decides who gets hip, knee, or heart surgery. Eight month wait for colonoscopies. In Canada, an eight week wait for cancer radiation. Say no to Obama's plan. Write Senator Evan Bayh today so you can still see your doctor tomorrow."

On Monday or Tuesday, we will e mail you info on how to donate to our campaign. We need to raise $4 million in one week to impact this vote. With those funds, we can saturate these states and send the moderate Democrats scurrying for cover. But we need your quick response.

The stakes have never been higher.

Thank you.

Go to DickMorris.com to read all of Dick's columns!

Paid For By Go Mike Bishop 803 W. University Drive Rochester, MI 48307

This message was sent topbrown83@gmail.com by
Go Mike Bishop, 702 Hayford, Lansing, MI 48912

Click here to unsubscribe

CBO on Stimulus

2009-03-02T16:01:00.000-08:00

I am not a huge fan of the stimulus. I think the range of programs is close, but that it should have been much larger. But, here is the CBO on the stimulus multiplier effects.

The output gap is still massive.

Weekend Round-up - Perception Gap

2009-03-01T16:24:00.000-08:00

Interesting piece from the New York Times about the recession, and when growth will resume.

Also, WSJ Real Time Economics has some great commentary on Warren Buffett's shareholder meeting this weekend.

Also, Tyler Cowen has a great link to an article mainly about unconventional monetary policy, and Matt Y. debunks bad arguments from the right and the left pretty much on a daily basis.

My own personal take away from the weekend of television and blogs was a clear perception gap in our democracy. It is astounding to me how upper middle class and rich people talk to their audience.

As Matt pointed out David Gregory, Brian Williams and many hosts are talking about tax increases, when 95% of families will being getting tax cuts. I'm no expert, but my guess those 95% are most of their viewers.

Greg Mankiw talked about how difficult it is for economists who decide to do public service, maybe I'm overly sensitive but it does seem that if this idea is onerous - then unemployment must be Armageddon (maybe my lack of family skews this perspective).

It is quite striking to me this idea that despite quantitative knowledge people's perception of the world based on their own situation skews objectivity one way or another. This is the true legacy of the Second Gilded Age and the income inequality that it has left us.

State of the Nation - Final Thoughts

2009-02-25T17:55:00.000-08:00

Generally, I thought that the speech hit just the right notes. The President and his writers (David Axelrod and Jon Favuer) do a great job of hitting all the correct political notes. Many of these ideas are laid down in the books The Political Mind and The Political Brain, both are worth the time.

As the President executed his political tap dance, he articulated commonsensical policy prescriptions for the problems we face as a nation. Not an easy feat. Health care, Energy Independence, Education, Curing Cancer, and Financial Regulatory Reform; he truly had policy prescriptions that both citizens and policy wonks alike can identify with.

That said, as a nation all short, medium, and long-term challenges and goals are trivial if the financial system it not fixed. On this agenda item I think that the President's words and the Administrations rhetoric have been opaque, weak, and reactive. And the speech had nothing new to offer in that regard.

Honestly, if I had to write a playbook about the first 100 Days of a Presidency it would be pretty close to what the Obama team has done, but this competence to this point has been overshadowed by the incompetence on the banking system front. I hope this is soon to change.

Again, I won't really be around the next week or so, so please read all of these folks to get an idea of what financial system reform is looking like and what it should look like.

News Reports

Stress Test

Housing Sales

Bank Capital

Citigroup - Zombie or Government Entity?

Government - Which Has Not Looked Good

Joint Statement

State of the Nation Address

Bernanke Testimony

Blogosphere - Where The Debate Has Been Smart and Lively

Calculated Risk (read everything yesterday and today)

Krugman (read it all)

Yves Smith (is on top of the debate)

WSJ Real-Time Economics (they talk to more reputable economists than anyone)

State of The Nation Address - Live Blog (from last night)

2009-02-24T18:40:00.000-08:00

9:31 - Pretty sure the President just proposed nationalization or private banking with public control

9:32 - CEO Bashing

9:33 - TARP has been run poorly. We need to solve the problem.

9:34 - We will do whatever it takes to fix the financial system. It is not about helping banks, its about helping people.

9:35 - We need to reform the financial system

9:36 - But lets look long-term .... health-care, energy, eduction....Budget is a Blue-print for the America I want to see.

9:37 - History says Reagan and Greenspan were wrong.

9:38 - G.I. Bill was a engine of growth.

9:40 - America needs to lead in battery and alternative technology.

9:41 - I want a climate change bill.

9:42 - We want and auto industry that is retooled and imagines the technology of tomorrow

9:43 - Health care is an economic problem for individuals, small businesses, and corporations

9:44 - (The Speaker was pumped) about SCHIP

9:45 - (I'm sorry but what doesn't this guy think he can do?) He just said we are going to cure cancer. And that we want preventive health care and coverage for all.

Away

2009-02-24T08:34:00.001-08:00

I have some things coming up so I won't be posting the next week or so. I am trying to stay on top of the nationalization story as closely as possible so I will stop in if possible to throw up updates and details on nationalization. Here are a few links.

http://woodwardhall.wordpress.com/2009/02/23/the-right-way-to-create-a-good-bank-and-a-bad-bank/

http://blogs.wsj.com/economics/2009/02/20/lessons-from-swedens-bank-nationalization/

http://taxprof.typepad.com/taxprof_blog/

Watch Out!!

2009-02-23T12:57:00.000-08:00

Nearly, four years from the next election, I can already tell you who Democrats should be scared of. And he is from Utah. Utah you say? Yes, Utah. Thanks to Nate Silver for the initial read on Gov. Huntsman.

Barack Obama is the best political talent I have seen in a generation, but this guy, Gov. Huntsman may end up being his kryptonite. Check out this flawless Politico interview.

I will tell you right now, he wins the Republican primary with his eyes closed, if he is just a little smart and charismatic (and he seems to have plenty of both). The right may be mobilized in four years, but the country is moving to the center demographically. This combined with the fact that Moderate Democrats and Independents will not have a Democratic primary to vote it. Their participation drives up turnout and Huntsman wins the Republican primary in about two weeks time in 2012.

Right now nothing is clear, but Stanford and Jindal are fighting for the support of the far Right, and this will wind up being a mistake. This will concede the entire middle to Huntsman.

In January 2007, I predicted an Obama/McCain general election with an Obama win. I know because the person I bet took Clinton/Romney. Based on this its difficult to predict future trajectory, especially because the economic recovery is still in question and moves so rapidly. It was not until Katrina that President Bush's public stock took a turn down, then the second leg of the chair fell when the violence accelerated to historically terrible levels in the Summer of 2006.

For the current President the Summer of 2010 and the November 2010 election will set the stage for 2012, of course their could be curve balls after that just like the Lehman Failure and the bailout like this past election cycle.

The saddest part of this narrative is that legislating will come to a stand still after about March 2010.

The smart money is still on Obama for 2012 because the economy will probably be back to full-employment, but Gov. Huntsman could make a compelling case in 2012.

Insightful Graph

2009-02-23T09:58:00.000-08:00

New Deal Deficit

This is a graph from Matt Y. I show this graph for a few reasons. One, it should show that spending during the early years of the New Deal was inadequate to "Jolt" the economy out of the Depression.

WWII - Quite a Public Works Project

Two, the public works project called WWII (Paul Krugman's phrase) was what got us out of the Depression. We can haggle about the details, but generally it was massive deficit spending and the huge inflow of capital to the United States to finance public and private investment (because we were the only safe place in the World).

Ideology - Did It Explode the Deficit?

Three, every Post-war President basically up until Vietnam (LBJ was half/half) was pretty fiscally responsible. It wasn't until Ronald Reagan and his economic theology came into vogue that we started to see the deficit explode. Then, Bill Clinton reduced the deficit significantly with wildly unpopular tax increases. Followed by President Bush who, as a tax cut zealot, tried his hardest to erase the deficit reduction.

Room to Run

Four, in the short-term we need to fix the banking system at any cost. This means swift bold action. Nationalize a few money center banks. Break them up into parts. Clean them up. And sell them off. The government might need to take another $500 billion or $1 trillion in losses cleaning up the mess, but the faster they do it and the bolder the housing plan the more they can mitigate such losses. Also, the whole capacity issue with the FDIC is silly. Bring in outside help, hire 15,000 workers, do whatever is necessary. This is like a non-issue issue because its expense is so inconsequential relative to the size of the banking problem (this is not to ignore the obvious time issue of training and HR which I am sure it the real problem).

Conclusion

In all seriousness, I believe in these arguments. One can disagree with my wit or approach, but by and large the facts don't lie. There is most certainly a little more nuance than I have time to address, but generally these are simple macro arguments that I do not see at the highest levels of government. Hopefully, they are going on behind closed doors - it doesn't like that way, but looks may be deceiving.

Stimulus Taxation

2009-02-22T14:42:00.000-08:00

Greg Mankiw posted this week about the stimulus raising the marginal tax rates of certain individuals. Besides the fact that this is less important to people than the rate they actual pay, its pretty dishonest.

Here is the non-partisan Tax Policy Center analysis.

Recovery - Slow or Fast?

2009-02-22T14:36:00.000-08:00

When recovery comes, the conversation that will ensue will be about world economic powers. Will the United States emerge stronger than ever? Will the whole world limp ahead? Will China and India take a great leap forward?

I do not know the answers to these questions, but if policy actions are taken quickly and effectively I like our chances. Health care reform, energy reform, education reform, and better tax policy could unleash a post crisis boom if they are done well.

We already have the human infrastructure (link is to a Richard Florida piece) to tackle such challenges, but we need better infrastructure in those other areas before consequential progress is possible.

FED - Consumer Credit

2009-02-22T14:30:00.000-08:00

A note on consumer credit. These markets, which over the near term will get about $1 trillion in new capital for the FED, have been quite frozen over the last few months. Things have gotten better, but not enough. The FED action will help, but the banking system generally and confidence in it are still the life blood of credit markets.

Here are the latest consumer credit numbers.

Health Care Reform

2009-02-22T13:16:00.000-08:00

Ezra Klein is a very good writer and blogger, but he is a heavy weight when it comes to health care reform.

He has invaluable information about reform, and the fact that it could happen this year.

For other sources on health care reform check out: ... more to come

Obama Political Operation

2009-02-22T12:54:00.000-08:00

The Obama political operation is quite something. Although the President himself has taken some lumps, his team is quite experienced and may have the right relationships to carry out his legislative agenda. Ezra Klein talks about this in more detail.

Those relationships are essential, but I would argue that there is another key piece to success. That is a personal relationships between the President and most law makers and stakeholders in Washington. He has made a good first step by meeting with all parties so many times throughout the first month.

Love him or hate him, the ultimate model for a relationship based legislative genius is Lyndon Johnson. As the story goes Johnson never read a book in all his years in Washington. He did read a few things: policy briefs, legislation, and summaries of legislators. As Senate Majority Leader Johnson knew the likes, dislikes, interests, hobbies, and pet projects of almost all his colleagues. I doubt the President will be able to emulate Johnson (for experience and ethical reasons), but broadly it is not a bad model to follow.

1964 and even more so in 1965, Johnson saw an avalanche of legislation go across his desk. My guess is that based on his agenda President Obama would like to see something quite similar.

To learn more about LBJ:

Link

Link

Link

Fiscal Summit - Tax Policy

2009-02-21T20:51:00.000-08:00

The Summit that will convene on Monday, and the first Obama Administration budget that will be released on Thursday are very important steps. First, we must realize the inherent unreliability of budget projections and estimates because almost no one knows that exact trajectory the economy will follow.

That said with governments (especially our's) borrowing so much money, it is important that policy makers send a strong signal that in the medium and long-term we are taking important steps to sure up our fiscal situation. Our AAA credit rating and our ability to borrow unlimited amounts in the short-term will be buoyed by our strong sign about future fiscal responsibility.

The Presidents main proposals seem to be income tax hikes on those who make more than $250,000, estate tax hikes on those who inherit more the $3.5 million, and ending the wars in Iraq and Afghanistan.

Although I think these things are necessary, I think the whole tax code needs to be reformed in a way that tax things we want less of and cuts taxes on things we want more of. I have some suggestions for the Obama folks such as:

- Institute a Carbon Tax: Many think $90 billion can be raised, I think we should raise about $250 billion by taxing carbon.

- Cut and Raise the Payroll Tax: Many conservatives say 40 percent of income earners do not pay taxes, not true they pay payroll taxes on up t0 $106,800 in income. First, broaden the base, every dollar in earned income should be subject to the payroll tax. Second, cut the rate. Right now the tax rate on Social Security is 6.2% for the employee (and the employer). The Carbon tax and the broadened base should give the leeway to cut the rate to about 4 or 4.5%.

- Institute a National Consumption Tax: Some estimates show that a consumption tax would raise about $100 billion for every 1% of taxation. Once we are back at full employment in 2011 or so, we can apply this tax at 1% then have it increase at 1/2% per year until at 2%, meaning by 2013 it will be bringing in about $200 billion per year. At that time the FED will think we need to start applying the breaks (because inflation will be a worry again - wont that be nice), they can take a longer lag while raising interest rates, because the consumption tax will have similar contractionary effects on the money supply. The concerns with a consumption tax is that it is regressive, so policy reform (like increases in the EITC, TRA, etc) will have to take place to compensate those hurt most by the tax.

There are a number of benefits. One, above there is mention of it as a countercyclical measure to help supplement FED action. Two, is the additional revenue. Three, it will be a measure that will spark more savings and an increased national savings rate - something that needs to be closer to the 7% of the early 1990s than the 0% of the preak houseing bubble years. Four, it can be changed to help affect the savings rate. Five, when the country goes through a tough reccession like the one we are going through now, cutting it will be a very simple first line of defense as stimulus.

- Cut Income and Capital Gains Taxes: As of right now, the income tax brackets in this country are as follows. For the bottom two brackets I propose that they be combined and turned into one 8% tax bracket. (this is less appealing and less important than payroll tax cut but it is important none-the-less)

- Raise Capital Gains Taxes: This above cut in the bottom two tax bracket should be combined with a change in the way we treat capital gains. All capital gains should be treated just like regular income. So, just like in Great Britain the two forms of taxation should be the same. This means all income would be taxed at income tax rates, including capital gains (this solves the carried interested problem we have when taxing hedge fund managers). The only exception will be that when people take their money out or retirement accounts at 59 and 1/2 the first $100,000 will be tax free (and have a yearly inflation adjustment), and every dollar after that will be taxed at 15% up to $500,000, and every dollar beyond that will be taxed at 25%. *Don't forget Roth IRAs are tax free.

- Raise the Gasoline Tax: A carbon tax will good, but it will be incomplete. Why not tax gas a little more? Or maybe a congestion tax?

- Raise the Alcohol and Cigarette Tax: We want to tax things we don't want like drunk drivers and lung cancer. Need I say more?

- Raise or Institute a Sin Tax on Certain Foods: I don't know that it is our place to do this, but creating a disincentive for kids to eat ice cream is probably a good idea considering the childhood diabetes rate around 2%.

As far as long term trajectory, I think that we need to continue to tax things we don't want and cut taxes on things we do want. Eventually, I would like to see much lower income, payroll, and capital gains tax rates (and these areas as a lower part of taxes as a percentage of GDP).

My hope is that over the next ten years the Carbon Tax will be massive to contain global warming and act as the tool of the second Great Compression (along with the other ideas), spurring on another era of a large middle class society.

Nationalization - Fear Grips the Markets

2009-02-20T18:00:00.000-08:00

As the last few weeks have progressed there has been growing consensus that for a short period of time the government will have to seize the commanding heights of the economy.

For Evidence of Consensus Please See:

Krugman

Greenspan(the godfather of Laizze-Faire)

Senator Dodd

Roubini

Senator Graham

Reich

Levitt (through Rosenfield)

Calculated Risk

The Guys at Marginal Revolution (we will call them the George Mason contingent)

And many others.

Over this time there has been a convergence of opinions from economists, policy makers, and politicians of every stripe. Today, the final elephant broke the back of the non-nationalization beast - constant media coverage (see anything from Bloomberg.com today). The ideas are somewhat different from different thinkers, but broadly their is consensus on nationalization, pre-privatization, receivership, or modified bankruptcy.

However, after the markets got crushed early in the day, there was a fairly substantial rally once Gibbs and Geithner started trumpeting their aversion to nationalization. According to Nate Silver and others this is merely a PR tactic that means they are actually considering nationalization.

For better information on the Swedish temporary nationalization (back in the day) read this. Many believe Japan's delay and Sweden's swift action are the difference in the two banking crises - the Powell Doctrine for financial crises.

The process would basically work like the FDIC's process when they take a bank over TEMPORARILY. To learn a little bit more about the process the FDIC goes through read a little more from a recent press release (when they took a bank over).

Is the process simple? No, by no means. But is the process necessary? Yes. It will most definitely put a strain on their resources, but it better than the alternative - can I get a Japan in the 1990s?

CNBC - Broadcast or Bloviation

2009-02-20T12:11:00.000-08:00

Ryan Avent makes a great point about some folks in the financial industry, namely Rick Santelli. Broadly, I agree with the point, but would go further.

Santelli's reporting throughout the crisis has been a plethora of mistake prone, myopic analysis. So, first we should avoid get angry for any reason, other than the fact that it is gross negligence to let someone go on the air and spread this erroneous crap.

Here is the big issue though. People like Santelli cannot see more than three feet in front of themselves. If he could see six or ten feet in front of himself, he would find a much different picture. The Obama housing plan, is a plan to help mitigate systemic risk, and to get mortgage markets in some type of working condition (or at least to stop the free fall).

Many people refer to the Great Depression with respect to this crisis, but I think Japan in the 1990's is almost a perfect analogy. For many if not most the lost decade was a bad time for Japanese citizens, Japanese standing in the World, and Japanese standards of living. With some exceptions this is true pretty much across the board.

What Santelli and friends do not realize is that if this crisis is not dealt with by use of overwhelming force (a sort of Powell Doctrine for economic crisises), then there could be long periods of extended stag-deflation that Nouriel Roubini talks about . Now, from high a top the financial towers of Chicago this may not seem obvious, but each and every day the banking situation and credit markets are not dealt with chance of such catastrophe grows.

One area that many commentators, including Santelli to some extent, are correct is in the area of of certainty and stability. After the "Stress Test" Geitner and Co. (FED, FDIC, C of C, etc) need to sweep in recapitalize boarder line banks, put the 4 or 5 insolvent banks into receivership, make a statement that this action is final barring some large unforseen event, and a strong statement of confidence in the FED's TALF program.

So, next time you watch the bloviators on TV (most of the right but undoubtly on the left as well), take a step back and realize that their conversations usually involve extaneous poltical and philosophical debates - not serious policy debates.

So where should policy wonks get serious analysis you say? Here and Here, for my money.

Accountability

2009-02-18T15:47:00.000-08:00

During FDR's four terms he was quite weary of corruption and waste because they could be so easily demagogued - sound familiar? Because of this FDR actually did a pretty good jobs of holding people accountable.

Looks like President Obama is going to to the same. Here is to the website. Here is a blog post today. Here is Peter Orszag's memo.

Tab Dump

2009-02-18T15:39:00.000-08:00

http://www.calculatedriskblog.com/2009/02/comments-on-housing-plan.html (I haven't completely went through this in a detailed way, hope to do so tonight or tomorrow)

http://tpmdc.talkingpointsmemo.com/2009/02/cha-ching-or-not-which-gop-governors-could-really-turn-down-stimulus-bucks.php

http://news.cnet.com/8301-13739_3-10159055-46.html

http://blogs.wsj.com/economics/2009/02/18/how-8-a-week-can-best-boost-the-economy/

http://www.fivethirtyeight.com/2009/02/things-i-think-we-think-we-know-about.html

Forclosure Plan

2009-02-18T08:49:00.000-08:00

Here is the text from the President's speech. And here is a great little example of who the plan will help and by how much.

If the plan can actually help 7-9 million homeowners that will have been a good days work. I will get back with outside estimates as soon as i find them.

Recovery.gov

2009-02-17T11:26:00.000-08:00

Website is very nice ... http://www.recovery.gov/

Economics Professsion - Great Piece

2009-02-17T08:07:00.000-08:00

This is a great article, but it is irritating that so many within the media and not even in academia give scathing rebuke to those who missed it while not acknowledging those who got it right.

I agree with much of what is said in this article. Part of the reason this has occurred is that there is now greater specialization in economics, but the media and public at large expect economists to pontificate on all issues economics.

The problem I have with the article is the monolithic group that economists are lumped into. First, undoubtedly many were wrong, including conventional wisdom. Second, and most importantly, there were many who saw this coming.

Here is a short non-exclusive list: RAGHURAN RAJAN, NOURIEL ROUBINI, PAUL KRUGMAN, and blogger CALCULATED RISK.

So, lets give credit where credit is due there were some serious economists who predicted this crisis, or predicted elements of this crisis. I think that the author should be a little more careful in spreading generalizations, when some important thinkers were pretty close to correct.

Here are other articles with more folks who were correct on various elements of the crisis. Link. Link. Link (this article is partly false because the ratings agencies played a big part in causing the crisis (correct portion); however Fannie and Freddie although a big part of the collateral damage were not a big cause of the problem).

A Biking Post?

2009-02-13T10:39:00.000-08:00

My cousin Adam has a blog on biking. I woke up in the middle of the night with this video in my head. Hope Adam has seen this.

Watch CBS Videos Online

The Geitner Plan - Financial System

2009-02-11T22:53:00.001-08:00

I have read Krugman, Roubini, Becker, Setser, Cowen, Mankiw, Stiglitz, Bernanke, Volcker, a former BOJ governor from the 1990s (sorry will try to get name, many economic and policy bloggers (on the right and left), numerous economics reporters, most of those in Congress courageous enough to talk about the crisis, and many others. Many of these individuals write and speak directly about the financial system, but many others only speak about elements of the recession or financial system. Through these thinkers I have gained what I believe to be a pretty decent understanding or the problem and possible solutions. (Disclaimer: I did make some admittedly bad assessments of the Bad Bank)

At this point my belief in the correct solution reflects both the political possibility and the economic imperative. Now, I must confess I do not completely understand the Geithner plan, but there is a chance that it is really really good. When I first heard the Geithner speech and envisioned what it actually meant I was upbeat.

First, this crisis has been handled from the supply side the entire time, and that response has been slow, inefficient, and necessary. One, aspect of the plan that looks promising is that banks getting TARP money will have to use the Sheila Bair loan modification method. Reports are that she started using the method during the IndyMac receivership, and estimates are that 1/3 to 1/2 of loans can be modified leaving both the homeowner and investor better off. I have talked on this blog about the very externalities that follow the unnecessary foreclosures (all foreclosures really). Hopefully, the administrations housing legislation is fair but ambitious because the housing issue needs a demand side solution as well.

Second, is the effort to try to loosening consumer lending markets: student loans, auto loans, etc.

Third, is the Geithner "stress test" plan. This is the part of the plan that is a little squishy, but could be good. From my reading a few of the foremost experts on these type of crisis are a few names in Sweden and Japan, Brad Setser, Nouriel Roubini, and Tim Geithner. So, when I hear the folks in the media say no one has any idea how to handle this crisis, I shake my head. If the plan looks like what Calculated Risk wrote tonight, it will be good, but time will tell how good.

1.) The stress test will look at the banks solvency over the next two years, considering both the balance sheet and off balance sheet instruments. There are two essential elements here. First, that the test include off balance sheet instruments. Second, that Geithner and Co. err on the negative side, in other words view all potential losses as losses - even the pretty farfetched.

2.) Structure the test in a way that all information about the 18 big banks is released all at once.

3.) That the 5 to 8 banks that are insolvent go under recievership with the FDIC. Now, this is the most important step. This is a political tight rope walk, but if it is explained to the public in a way that people know the FDIC is doing what they do everyday it will be excepted. Each of these institutions will have their balance sheets cleaned up then will be sold off.

4.) The key to all of this is who and how many banks fall into the above category, and which and how many banks will be close to the line. Then, for these insitutions on the proverbial edge, how much money will they need? From everything I know about Tim Geithner and his experience, he will err on the side of insolvency and receivership. This is the big question though.

I have some Law and Economics tomorrow, but I will be back Friday to talk about the next step - Financial Regulation and Oversight to bring confidence back to the financial markets.