MONEY AND WORK

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January 22, 2009

CRASH TALK

MSNBC - Wall Street is losing faith in Washington's efforts to fix the financial crisis. As bank losses pile up and bank stocks plunge, investors have an urgent question for the new Obama administration: What's the plan?

Timothy Geithner, Obama's pick for treasury secretary, had few answers as he began confirmation hearings Wednesday. He told lawmakers that two goals were to "get credit flowing again" and overhaul the $700 billion bailout, but he offered few details. . .


"The size of the problem is growing faster than the banks' ability to handle it," said Joe Battipaglia, market strategist at Stifel Nicolaus. "We're halfway through the bailout money, and the banks are in worse shape than they were six months ago.". . .


The fear is that both banks are so big, so blended into the global financial system, that their collapse could trigger a catastrophe. The most troubled banks are "going to definitely go down" without more government help, said Jonathan Macey, a law professor at Yale University who wrote a book about a bailout of Sweden's banking system during the 1990s.


"And they may go down with it," he added. "The pace of these bank losses is outrunning the infusions by the government.". . .


In a report last week, Goldman Sachs estimated that financial institutions and investors worldwide will ultimately absorb $2 trillion in losses on U.S. loans - but have recognized only half those losses so far.


William Greider, Nation - The most complex barrier to recovery is globalization and its negative impact on the economy. Given our grossly unbalanced trade, we have kept the system going by playing buyer of last resort--absorbing mountainous trade deficits and accumulating more than $5 trillion in capital debt to pay for swollen imports, while our domestic economy steadily loses jobs and production to other nations. Renewed consumer demand at home will automatically "leak" to rival economies and trading partners by boosting their exports to the US market--which subtracts directly from our GDP. This is the trap the lopsided trading system has created for recovery plans, and it cannot be escaped without fundamental reform.


To put it crudely, Obama's stimulus program might restart factories in China while leaving US unemployment painfully high. In fact, some leakage may occur via the very banks or industrial corporations that taxpayers have generously assisted. What prevents Citigroup and General Motors from using their fresh capital to enhance overseas operations rather than investing at home? The new administration will therefore have to rethink the terms of globalization before its domestic initiatives can succeed. . .


Congress can enact the terms now--a ceiling on US trade deficits that will decline steadily to tolerable levels, as well as new rules for US multinational enterprises that redefine their obligations to the home economy. Unlike in other advanced nations, US companies get a free ride from their home government when they relocate production abroad. That has to change if the United States is to reverse its weakening world position. . .

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