EconomicCrisis.US

The U.S. economy came “very close” to collapsing into a second Great Depression and the government had no alternative to bailing out financial firms, former Treasury Secretary Henry Paulson said.

“There was a time when the credit markets had essentially frozen and when blue chip industrial companies were having trouble raising money,” Paulson said in an interview today on Bloomberg Television. “I knew then we were on the brink.”

“We easily could have had unemployment of 25 percent,” he said. “That would have meant millions of additional jobs lost, millions of additional homes lost, trillions more lost in savings. It would have been terrible.”
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Summary

President Obama’s proposed reform of US banks has not received universal acclaim. In particular, the UK government’s response has been rather lukewarm. What I think we are seeing are different responses to the same short term political challenge, ie bank bonuses that laugh in the face of suffering tax payers who have made the continued payment thereof possible. US and European (well, British) responses to this challenge are very different. They risk damaging consensus on global banking reform.
Analysis

President Obama signalled a significant change in direction last week, with his proposals to limit the activities of banks. He had previously shown little appetite to interfere with the structure of US banking groups, but simply identify those activities posing the greatest risk and use regulatory and market solutions (eg increased capital requirements) to increase control and/or decrease risk.
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U.S. economic conditions stabilized or improved modestly in most parts of the country, according to a Federal Reserve report on Wednesday that suggested the economy was slowly clawing out of a recession.

In its “Beige Book” of anecdotal reports on the economy, the Fed noted improvement in two of the hardest hit areas — residential real estate and manufacturing.

“Reports from the 12 Federal Reserve districts indicated either stabilization or modest improvements in many sectors since the last report, albeit often from depressed levels,” the Fed said in its report, which was prepared at the Federal Reserve Bank of Richmond based on information collected before Oct. 13.
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Third quarter earnings season is still ongoing but if you read closely into the numbers, fundamentals have barely improved, which stand at odds to the heady valuations arising from this stock market rally. On the bright side, JP Morgan (JPM) and Goldman Sachs (GS) reported blowout earnings. However, trading is the name of their game which has little bearings on lending, production and gainful employment in the real economy.

It is unclear how well the balance sheets of the remaining Wall Street bastions stand up to scrutiny when interest rates are raised, mark to market accounting resumed and all the fanciful Fed’s creations (like Primary Dealer Credit Facility, Commercial Paper Funding Facility, Term Asset-Backed Securities Loan Facility, Term Securities Lending Facility Options Program, etc) are withdrawn.
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