I like her honesty up till the end. She’s ignorant or disingenuous by calling the busts of times past cycles. If you look at the controlable events (government regulations, both statewise and nationally) and uncontrolable events (gold rush, etc.) you can find the causes. Those events which corrected quite quickly relative to everything since the Great Depression. Creating a system which creates a small (usually) stimulator (FRS, FDIC) and adds governors (regulations) which causes a true cycle and lengthens the periods between natural corrections by pushing through bad investments is not a solution. It’s a system which can not work. It is fundimentally flawed. It ignores human nature, distorts incentives, creates moral hazards, destroyes natural regulation, removes personal responsibility and risk, and allows the biggest debter, government, to get away with far more than they should if the current subjects had to pay rather than their great grand children. It doesn’t take a reading of Human Action to figure out the results of such policy… just to sit down and follow the chain of causation.

http://www.bloomberg.com/…

The following table details how the Fed and the government have committed the money on behalf of American taxpayers over the past 20 months, according to data compiled by Bloomberg.

===========================================================
                                  --- Amounts (Billions)---
                                   Limit          Current
===========================================================
Total                            $12,798.14     $4,169.71
-----------------------------------------------------------
 Federal Reserve Total            $7,765.64     $1,678.71
  Primary Credit Discount           $110.74        $61.31
  Secondary Credit                    $0.19         $1.00
  Primary dealer and others         $147.00        $20.18
  ABCP Liquidity                    $152.11         $6.85
  AIG Credit                         $60.00        $43.19
  Net Portfolio CP Funding        $1,800.00       $241.31
  Maiden Lane (Bear Stearns)         $29.50        $28.82
  Maiden Lane II  (AIG)              $22.50        $18.54
  Maiden Lane III (AIG)              $30.00        $24.04
  Term Securities Lending           $250.00        $88.55
  Term Auction Facility             $900.00       $468.59
  Securities lending overnight       $10.00         $4.41
  Term Asset-Backed Loan Facility   $900.00         $4.71
  Currency Swaps/Other Assets       $606.00       $377.87
  MMIFF                             $540.00         $0.00
  GSE Debt Purchases                $600.00        $50.39
  GSE Mortgage-Backed Securities  $1,000.00       $236.16
  Citigroup Bailout Fed Portion     $220.40         $0.00
  Bank of America Bailout            $87.20         $0.00
  Commitment to Buy Treasuries      $300.00         $7.50
-----------------------------------------------------------
  FDIC Total                      $2,038.50       $357.50
   Public-Private Investment*       $500.00          0.00
   FDIC Liquidity Guarantees      $1,400.00       $316.50
   GE                               $126.00        $41.00
   Citigroup Bailout FDIC            $10.00         $0.00
   Bank of America Bailout FDIC       $2.50         $0.00
-----------------------------------------------------------
 Treasury Total                   $2,694.00     $1,833.50
  TARP                              $700.00       $599.50
  Tax Break for Banks                $29.00        $29.00
  Stimulus Package (Bush)           $168.00       $168.00
  Stimulus II (Obama)               $787.00       $787.00
  Treasury Exchange Stabilization    $50.00        $50.00
  Student Loan Purchases             $60.00         $0.00
  Support for Fannie/Freddie        $400.00       $200.00
  Line of Credit for FDIC*          $500.00         $0.00
-----------------------------------------------------------
HUD Total                           $300.00       $300.00
  Hope for Homeowners FHA           $300.00       $300.00
-----------------------------------------------------------
The FDIC’s commitment to guarantee lending under the
Legacy Loan Program and the Legacy Asset Program includes a $500
billion line of credit from the U.S. Treasury.

Awesome. And Krugman says they aren’t spending enough. I guess we need to catch up to Japan with their debt being 170% GDP. Obama’s going to have to do better than $10 trillion deficit over the next 8 years to pull this off.

http://www.bloomberg.com/…

The Federal Deposit Insurance Corp. will charge U.S. banks a one-time assessment and increase other fees to replenish its insurance fund, adding $27 billion in costs to an industry already hobbled by the financial crisis.

The FDIC board today approved charging banks an “emergency special assessment” in response to an estimate that bank failures could cost the fund $65 billion through 2013. The added fees are projected to generate $27 billion this year, compared with the $3 billion raised in 2008, the FDIC said.

“We’re taking steps today to ensure that the deposit insurance system remains sound,” FDIC Chairman Sheila Bair said today during the board meeting at the agency’s Washington headquarters. “These steps are necessary because banks, and not taxpayers, are expected to fund the system.”

The deposit insurance fund fell to $18.9 billion in the fourth quarter from $34.6 billion in the preceding three-month period, the FDIC said yesterday. The fund, used to reimburse customers for deposits of as much as $250,000 when a bank fails, has been shrunk by 39 failures since the beginning of 2008.

The FDIC is required by law to replenish the fund when the reserve ratio, or fund balance divided by insured deposits, falls below 1.15 percent. It stood at 0.40 percent at the end of the fourth quarter, the lowest level since the second quarter of 1993, the agency said yesterday.

The one-time emergency fee of 20 cents per $100 in insured deposits would be collected in the third quarter and would generate $15 billion, according to FDIC staff members. A bank with $1 billion in deposits would pay $2 million under the special assessment, they said.

Like the banks need this right now… but it was entirely predictable.

http://finance.yahoo.com/…

The incoming Obama administration is considering setting up a government-run bank to acquire bad assets clogging the financial system, a person familiar with the Obama team’s thinking said on Saturday.

The U.S. Federal Reserve, Treasury and Federal Deposit Insurance Corp have been in talks about ways to ease a banking crisis that is once again deepening — and a government-run “aggregator bank” is among the options.

Outgoing Treasury Secretary Henry Paulson and FDIC Chairman Sheila Bair both said on Friday a government bank was one of a number of ideas U.S. regulators had been discussing.

The source said advisers to President-elect Barack Obama, who takes office on Tuesday, were also considering the idea of an aggregator bank among a range of options that could be pursued.

David Axelrod, a top adviser to Obama, told Reuters the new administration would have something to say about a fresh approach to the financial crisis in “the next few days.”

Yes… because the first two worked out so well.

The story is a few days old but I’ve not seen much coverage. It seems doubtful to me something like this would occur. Those in power and coming to power seem to prefer fascism to socialism.

http://www.usatoday.com/…

More than half of mortgages modified in a bid to avoid foreclosure fell delinquent within six months, a top U.S. banking regulator said Monday, casting doubt on a proposal to rewrite home loans en masse.

Comptroller of the Currency John Dugan said it is unclear why so many borrowers ran into trouble again so soon after getting help, and that raises questions about how policymakers should address loan modifications.

“Is it because the modifications did not reduce monthly payments enough to be truly affordable to the borrowers? Is it because consumers replaced lower mortgage payments with increased credit card debt?” Dugan said at a housing conference in Washington organized by the Office of Thrift Supervision.

“Is it because the mortgages were so badly underwritten that the borrowers simply could not afford them, even with reduced monthly payments? Or is it a combination of these and other factors?”

The crumbling housing market is at the heart of the financial crisis that tipped the United States into recession and dragged down the global economy, and regulators are scrambling to find a way to limit foreclosures.

Sheila Bair, chairman of the Federal Deposit Insurance Corp, has been a big proponent of a home loan modification program that would encourage lenders to rework a greater number of mortgages by pledging public money to share the cost of defaults on restructured loans.

However, Dugan’s figures suggested that the cost to taxpayers may be high. He said his data showed that of mortgages that were modified in the first three months of 2008, nearly 36% had re-defaulted after three months, and almost 53% were behind on payments by six months.

These people lived far beyond their means. Dropping the monthly payments isn’t likely to help greatly as the banks are going to be incentivized to keep payments higher otherwise the mortgage would be spread out possibly over several decades. One should not ignore too that those with mortgages are incentivized not to worry much about keeping payments up to date given the bailout mentality currently running rampant. Why bother paying my mortgage when if I default the government will step in and take on the high risk, low return debt and refinance it to something ridiculously low? The system is entirely incentivized to fail… the fact it works at all is a testament to the market and some people’s personal responsibility.

http://www.lewrockwell.com/…

Writes Bob Higgs:

My source is Bloomberg.Requiring the Fed to disclose loan recipients might set off panic, said David Tobin, principal of New York-based loan-sale consultants and investment bank Mission Capital Advisors LLC.

“If you mark to market today, the banking system is bankrupt,” Tobin said. “So what do you do? You try to keep it going as best you can.”

I believe he said “the banking system is bankrupt.” That seems like an honest statement. And then he said “you try to keep it going.” Pretty cool, eh. Zombie banking system. Keep it going.

Some of the bailout assistance could come from tax breaks in the future. The Treasury Department changed the tax code on Sept. 30 to allow banks to expand the deductions on the losses banks they were buying, according to Robert Willens, a former Lehman Brothers tax and accounting analyst who teaches at Columbia University Business School in New York.

Wells Fargo & Co., which is buying Charlotte, North Carolina-based Wachovia Corp., will be able to deduct $22 billion, Willens said. Adding in other banks, the code change will cost $29 billion, he said.

“The rule is now popularly known among tax lawyers as the ‘Wells Fargo Notice,’” Willens said.

The regulation was changed to make it easier for healthy banks to buy troubled ones, said Treasury Department spokesman Andrew DeSouza.

Note: the Treasury changed the law. The pretense that Congress makes the laws, with the president’s assent, has apparently been abandoned as unnecessary in a crisis. Besides, under the present emergency regime, the Treasury is the government, with assistance from the Fed and the FDIC. All the rest is mere window dressing.