Wednesday, March 31, 2010

Elizabeth Warren: The economy will face another “very serious problem”

In a CNBC interview Elizabeth Warren, Chair of the TARP Congressional Oversight Panel, warned that half of all commercial mortgages will be underwater by years end.  Warren explains the ominous implications of this news:
“They are [mostly] concentrated in the mid-sized banks,” Warren told CNBC. “We now have 2,988 banks—mostly midsized, that have these dangerous concentrations in commercial real estate lending."

As a result, the economy will face another “very serious problem” that will have to be resolved over the next three years, she said, adding that things are unlikely to return to normalcy in 2010.

Warren's concern concentrates on the potential for problems in midsized banks, but also refers to plans to sell the 7.7 billion shares held by the Treasury acquired during the bailouts last year. The implications of a divestiture of that magnitude creates a good deal of uncertainty and Warren claims to have had difficulty gaining clarity on the company's future plans.

Warren is much more direct, however, when discussing the path forward for Fannie Mae and Freddie Mac:
Warren said it’s time for the government to "pull the plug" on mortgage lenders Fannie Mae and Freddie Mac.

“I’m one of those people who never liked public-private partnership to begin with. I think what they did was use public when public was useful and private when private was useful,” she said. “And I think we’ve got to rethink that whole thing.”
I wonder what Maxine Waters will have to say about that news. Perhaps Warren hasn't heard the news there is no crisis at Fannie Mae and Freddie Mac.

Much of what Warren says in this interview is not necessarily news. One of my earliest posts on this blog focused on an interview with Warren where she made the same points about the commercial lending market. Warren warned of this again in February prompting Tim Geithner to suggest a less than inspiring solution to the potential problem. Again, not much new there. Perhaps what is newsworthy here is her conclusion, we will not return to normalcy in 2010.

Frankly, this news much like Warren's previous warnings, isn't likely to get lots of play in the media because it offers little hope for Democrats.  One of the more interesting pieces in the news yesterday was an admission, albeit anonymously the Democrats were knowingly sacrificing their majority in voting for Obamacare. Their best possible hope would be a sudden resurrection of the economy in time for the midterm elections. Warren all but seals the tomb on that potential. It is almost unfathomable what damage Democrats would take at the polls should a string of midsized banks begin to collapse before that time. I would think Geithner's suggested bailouts could be a final straw. I am quite confident Democrats will be devastated in November regardless, so let's hope that happens without the "assistance" of another banking crisis.  There will be enough to clean up as it is.

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