An Economic Reality Check

Tue, 18 Aug 2009 14:03:18 +0000

Your must-read column for today is by David Corn at, "An Economic Time-Bomb Being Mishandled by the Obama Administration?" For the hard-to-value assets that the TARP and bailouts were supposed to address, out of sight does not mean out of mind. The key excerpt:

In a conference call with a few reporters (myself included), Elizabeth Warren, the Harvard professor heading the Congressional Oversight Panel, noted that the biggest toxic assets threat to the economy could come not from the behemoth banks but from the "just below big" banks. These institutions have not been the focus of Treasury efforts because their troubled assets are generally "whole loans" (that is, regular loans), not mortgage securities, and these less-than-big banks have been stuck with a lot of the commercial real estate loans likely to default in the next year or two. Given that the smaller institutions are disproportionately responsible for providing credit to small businesses, Warren said, "if they are at risk, that has implications for the stability of the entire banking system and for economic recovery." Recalling that toxic assets were once the raison d'etre of TARP, she added, "Toxic assets posed a very real threat to our economy and have not yet been resolved."

It is true that the commercial loans held by these banks are an unappreciated danger. But the big banks are not out of the woods by any means -- they are still carrying assets linked to private equity firms and other parts of the "shadow banking system" that have not received much attention. As they say, sunlight is the best disinfectant -- we have seen what hiding financial weakness can do to the real economy.