They’ve likened the economy to a nasty car crackup, so it’s fair to ask whether our Congressional/Treasury/regulatory authorities are hauling the wreckage off the highway so traffic can start moving again, or whether they’ve blocked the highway with their emergency equipment and made the backup worse. I’m not optimistic. Let’s look at what’s been done, proposed, and what’s next in store:

The Debutante.  Secretary Geithner’s debut last Tuesday was a dismal failure. The reason: style matters, and Geithner’s political skills appear well below his pay grade.  Worse, he was ill-prepared.  His audience expected particulars.  Instead, he offered doomsday rhetoric that gratuitously heightened doubt and uncertainty.

The Banking “Plan”.  The only definitive item in Geithner’s presentation was the plan to “stress test” banks with assets of more than $100 billion, in order to determine whether and how institutions would receive future government lucre.  But stress-testing is nothing new, and is expected in an environment such as this one.  All large banks already stress-test their loan and investment portfolios.  As Tom Brown notes, stress-testing is not an especially useful all-purpose test, so it’s doubtful that it can be the centerpiece of the Treasury’s plan, or that it signals an important regulatory or policy change.  After all, regulators continue to close insured institutions every weekend. 

The Mortgage Foreclosure “Plan”.  While it’s become pretty clear loan modifications don’t do much to help delinquent borrowers, Congress has nonetheless demanded that lenders do more to mitigate foreclosures. The administration has scheduled announcement of its $50 billion plan Wednesday. Recall that the OCC and OTS jointly published a report last fall that found that that 54% of modified loans re-default within six months.  So is this only a matter of throwing good money after bad?  Unfortunately, no. The government’s push to mitigate foreclosures has introduced game theory and moral hazard into mortgage markets by encouraging responsible homeowners to act less responsibly.  Foreclosure moratoriums, principal cramdowns, and the like threaten to permanently impair mortgage securitization mechanisms, and will likely lower the mark-to-market value of most asset-backed securities, regardless of their cash flow and credit performance.  In last week’s House Financial Services Committee’s hearing/show trial, Goldman Sachs CEO Lloyd Blankfein testified that mortgage cramdowns could cause less capital to flow into mortgage markets. It bears mentioning that the value eroded by irresponsible government actions will increase investor losses and taxpayer costs worldwide.

Congressional Hearings.  And speaking of last week’s TARP accountability hearings, could anything better prove the old aphorism that that legislatures are meetings of idle people?  How did these hearings serve the Treasury’s goal of attracting private capital to the banking sector?

Executive Pay Caps.  There is probably no better example of legislative excess than the spectacle of Banking Committee Chairman Senator Chris “Friend of Angelo” Dodd inserting new and retroactive pay caps on bank executive compensation.  Dodd is in trouble with his constituents back in Connecticut, where the Hartford Courant has reported the evolution of his many explanations for his sweetheart Countrywide mortgages. Congress should not be in the business of dictating private-sector compensation. It’s outrageous that this Senator, in particular, wants to get into the act. 

Mark-to-Market Accounting.  It continues to amaze that our authorities won’t even speak of the principal root causes of this wreck, namely mark-to-market accounting for illiquid and hard-to-value investments.  FAS 157 valuations are unrealistic even as the rule creates very real capital adequacy and insolvency problems in banks, insurers, and others.

No doubt some vital issue is missing from this list, but it’s hard to conclude that our public servants are on the job.  They’re either ill-prepared, working at cross purposes, covering keisters, practicing legislative legerdemain, rubbernecking, or actively contriving to make serious problems worse. 

No surprise that you and I are caught in the gridlock, left to wonder when the traffic will flow again.

What do you think?  Let me know!