krebscycle

And policy responded pretty effectively, too: the financial crisis may have come as a shock, but it was more or less contained by the spring of 2009. – Paul Krugman, February 2014. 

Oh, really. Well, Dr. Krugman thought differently at the end of February 2009 

An important article by Gillian Tett about actual recovery rates on AAA-rated CDOs. (They’re worse than even the pessimists thought.)

Why is this important? A recurring theme of those who believe that the financial system can be rescued with fancy financial engineering — a group that, sad to say, apparently now includes the Obama administration — is that the losses on toxic assets aren’t really as bad as people say; that lack of liquidity and “irrational despondence” have led to an undervaluation of these assets, and that if we can just calm things down and get cash flowing again all will be well.

Not so much, it seem

How could the dumb Obama Admin have fixed anything by Spring? And at the end of March 2009 (is that Spring?)

If so, that doesn’t mean the worst is over. There was a pause in the plunge in early 1931, and many people started to breathe easier. They were wrong.

So far, there’s nothing pointing to a fundamental turnaround this year, or next, or for that matter as far as the eye can see.

And this:

The Obama administration is now completely wedded to the idea that there’s nothing fundamentally wrong with the financial system — that what we’re facing is the equivalent of a run on an essentially sound bank. As Tim Duy put it, there are no bad assets, only misunderstood assets. And if we get investors to understand that toxic waste is really, truly worth much more than anyone is willing to pay for it, all our problems will be solved.

And this:

It’s as if the president were determined to confirm the growing perception that he and his economic team are out of touch, that their economic vision is clouded by excessively close ties to Wall Street. And by the time Mr. Obama realizes that he needs to change course, his political capital may be gone.

And in April – surely April is Spring

So the market was greatly reassured when Tim Geithner declared that the “vast majority” of banks are well capitalized. Count me as baffled. I mean, maybe he was actually giving us a hint about the stress tests — but I took it as a remark that was uninformative at best, ominous at worst.

After all, there are a lot of banks in America. There are 1,722 institutions on the Fed’s list of “large commercial banks”. And I have no doubt that most of these banks — indeed, the vast majority — are in fine shape. That’s because they’re regional institutions that never got into the risky games played by the big guys.

But the big guys are where the money is. The top 10 institutions on that list have 58 percent of the assets. (If we looked at bank holding companies rather than only commercial banks, assets would be even more concentrated.) So it’s perfectly possible that the “vast majority” of US banks are well-capitalized, but that banks with, say, a third of the system’s assets are insolvent.[my bold root_e]

Oh. I say. Oh.