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.

Again With the $1.3 Trillion Inherited Deficit?

This time from Bruce Bartlett, a conservative economist who should probably know better than to make a statement like this:

In January, the Congressional Budget Office projected a deficit this year of $1.2 trillion before Obama took office, with no estimate for actions he might take. To a large extent, the CBO’s estimate simply represented the $482 billion deficit projected by the Bush administration in last summer’s budget review, plus the $700 billion Troubled Asset Relief Program, which George W. Bush rammed through Congress in September over strenuous conservative objections.

Ahemmm, which branch of government votes on the federal budget? Why Mr. Bartlett would that be the Legislative branch, meaning the House of Representatives and the Sentate? Next question, which party has had control of the House and Senate since 2006? Why that would be the Democratic party, wouldn't it? Now, trick question, what man who happens to reside at 1600 Pennsylvania Ave., was a member of The US Senate last year? If you guessed Barack Obama, you would be correct. How did he vote on that TARP legislation:



Of course, this is not Mr. Bartlett's sole argument in this piece. He argues that had McCain won the election the economy would be as bad as it is right now and that our anger should be targeted on George W. Bush. Bush is not President and has no control over where this country goes in the future, what's the point? Whether the economy would be the same under a McCain presidency is not certain. I am pretty sure we wouldn't have had the $800 billion porkulus bill rammed down our throats leaving the bill for our children to pay. I am sure we wouldn't have the extra $400 billion Omnibus spending bill. I am pretty sure we would not be talking about "single payer" health care or a "strong public option," whatever that means. Whether or not the economy improved under McCain or was at least equally bad, we wouldn't have added to the deficit in such a massive way and irresponsible way.

We most likely wouldn't have pent up demand for deals and mergers in the health care industry as well as in other facets of the economy. It's hard to imagine a President McCain would have nationalized the automobile industry and in so doing sent the precarious message to all, contracts don't mean what you think they mean. It seems to me with McCain we would have at least had rules, and with rules you have certainty. Markets love certainty, they like to know the rules. With a President Obama, the only thing certain is the uncertainty.

Elizabeth Warren: Geithner Spreading $2 Bets All over the table in Vegas

Elizabeth Warren, Chair of the Congressional Oversight Panel charged with inspection of the bank bailout funds through TARP appeared on "Morning Joe" today. Warren described the initial half of the bailout funds $350 billion spent by Paulson as the "Don't Ask Don't Tell," funding meaning the money was given to the banks without requiring financial institutions to report how it was being spent. Geithner is spending the second half spreading it around in smaller doses to cover potential threats in many different facets of the financial industry. The bottom line, however, financial institutions are still holding much of the troubled assets on their books rather than selling them and taking the losses that would necessarily follow the assets being sold at their more realistic market value.

"By and large, the toxic assets that brought us to this point are still on the books of the banks," she said.

Warren makes it clear the threats arising from these assets are far from over. Watch the video; it is rather long but an interesting and often disturbing exchange.

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Warren seems concerned the larger threat still looming is in the commericial mortgage market which is largely held by mid-sized and smaller financial institutions. Should a small bubble begin to emerge in the market, we could easily end up where we were last Fall. When pressed by Scarborough as to whether the bailouts saved the economy from a complete collapse, Warren appears somewhat reluctant to give an opinion. She does finally admit that though there would have been some pain and some large institutions would no longer be in business, it seemed unlikely the death spiral would have occurred.