Will the Other Shoe Drop

It is odd to watch the stock market booming in the midst of economic wreckage. Most economic forecasters tell us that the worst months are still ahead, but some investors thinks there are bargains to be had and a buying frenzy has moved the markets up 20% since March 9th. Amazing. The banks are reporting "profitability" in the first two months of 2009 and the stock market blooms.

I'm a sceptic. Here's a video that tells me that the worst is not over. Here's a bit of Congressional testimony that indicates that a lot of bad news is still to come.

The key testimony: "The single largest financial asset of most of the banks ... are loans, and loans are carried on a cost basis that may not timely reflect the problems that may underlie them. The allowance for loan losses lags the problems." What the Congressman gets this accounting standards regulator to admit is that there are a number of big banks that are most likely insolvent that who are pushing very hard to modify the "mark to market" accounting rule to help hide this fact, the fact that they are bankrupt. Note that the regulator says "yes":



I hope I'm wrong in my scepticism. I hope that the market bottom is behind us and prosperity is now blossoming on Main Street and everywhere. I do hope that we have been snatched from the jaws of death.

But a wee sceptical voice keeps telling me that the worst is still to come. We will survive this recession/depression, but we are not lucky enough to live in a universe where a quick drop in Wall Street/Main Street will be followed by a quick recovery. I've finally come to accept that it will take years -- even if Obama can successfully keeps going back to Congress for more trillion dollar stimulus packages -- before there will be a solid recovery. I hope I'm wrong, but that's what the wee voice in the back of my mind keeps telling me.

Here's Dean Baker's assessment of the Wall Street rally:

Suppose Timothy Geithner announced a new program that would tax every family $10,000 dollars and give the money to Wall Street banks and hedge funds. (Any resemblance between this hypothetical program and real world programs is purely coincidental.)

We would expect the stock of Wall Street banks and other financial sector firms to rally based on the anticipation of higher profits. Is this good for the economy? It's not in any obvious way. After all, we can always tax people more to raise profits for Wall Street, but that doesn't help the economy.

Reporters should remember this when assessing Wall Street's response to the plan proposed by Geithner for buying bad assets from banks. The larger the subsidy, the better the news for Wall Street. It's not clear that most of the public should be happy about seeing more of their tax dollars going to Wall Street.