Is there a ticking time-bomb for the US economy? And is the Obama administration, Congress, and the media not paying it sufficient attention? That seems to be the message of a government report released this week that drew not as much notice as it deserves.
This is all about those toxic assets--now euphemistically referred to by the US government as "legacy assets"--that were at the core of the economic meltdown. Though some economic news of late has been not so bad--economic contraction slowing, job losses leveling off, banks passing stress tests--these toxic assets still pollute the nation's financial system and endanger it.
On Tuesday, the Congressional Oversight Panel
, which was set up to monitor the $700 billion Troubled Assets Relief Program (aka the Big Bank Bailout), put out another of its monthly reports, and this one notes
that the Treasury Department has not used its TARP billions to purchase this junk--which includes both lousy commercial and residential mortgages and
securities based on lousy mortgages--and that billions of dollars of toxic assets remain on the books, threatening the security of numerous financial institutions.
In other words, whoops.
What's happened is that accounting changes have made it easier for banks to contend with these assets. But this bad stuff hasn't gone anywhere. It's literally been papered over. And it still has the potential to wreak havoc. As the report puts it:
If the economy worsens, especially if unemployment remains elevated or if the commercial real estate market collapses, then defaults will rise and the troubled assets will continue to deteriorate in value. Banks will incur further losses on their troubled assets. The financial system will remain vulnerable to the crisis conditions that TARP was meant to fix.
So all those hundreds of billions spent by TARP were for naught? Treasury officials will tell you that they used the money to pump capital into banks--rather than buy their garbage--and this stabilized the financial system. Perhaps that worked. But, as the report makes clear, the original sin still stands.
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."
Yes, you've heard about various government efforts to deal with this mess. With much hype, Secretary Timothy Geithner in March unveiled a private-public plan to buy up this financial waste. But the program has hardly taken off, and it has ignored a big chunk of the problem (those "whole loans"). As the WhyYouCare.com website, which tracks news at the intersection of politics and finance, points out
, "The regulators have started to move to make financial institutions address these troubled assets, but their efforts have been tenative."
The Congressional Oversight Panel warned that "troubled assets remain a substantial danger" and that this junk--which cannot be adequately valued--"can again become the trigger for instability." Warren's panel does propose several steps the Treasury Department can take to reduce the risks. But it's frightening that Treasury needs to be prodded by Warren and her colleagues, who characterized troubled assets as "the most serious risk to the American financial system."
It's also frightening that this fundamental issue barely registers a blip on our collective Attention-O-Meter. The panel's report warranted merely a small article
on the second page of The New York Times
' business section. White House reporters didn't ask press secretary Robert Gibbs about it. Sarah Palin's stupid comments
about health care reform certainly light up the blogosphere. But Treasury not taking all necessary steps to avert another financial collapse? That's a yawner. The Obama White House--and all of us--better hope that this panel is worrying needlessly.
Shane Bauer, the journalist/hiker who has been detained in Iran, wrote an excellent piece for my home base, Mother Jones
, long before he was detained. But it just came out, and you can read it here
. And his family and the families of his two detained companions have put out a statement that can be read here