A few years back, while researching my second book Snitch I found myself returning to one simple question: why has even modest criminal justice policy reform been so difficult to achieve?

The question was sparked specifically by the notorious 100:1 disparity between sentences for crack and powder cocaine.

This injustice had been decried for more than a decade by drug policy reform advocates to even federal judges. Yet the sentencing disparity between the two forms of essentially the same drug proved incredibly difficult to change. Indeed, since 1995 The United States Sentencing Commission (USSC) repeatedly criticized the guidelines for being too harsh and for applying mostly to low-level offenders--yet nothing changed. [More...]

NYTimes:

Regulators say all 19 banks undergoing the [stress test] exams will pass them. Indeed, they say this is a test that a bank simply will not fail: if the examiners determine that a bank needs “exceptional assistance,” the government, that is, taxpayers, will provide it.

Does anyone believe anything that comes out of the Geithner Treasury Department at this point? I don't. I like Kevin Drum's reaction -- "I'm having a harder and harder time figuring out what's going on as time goes by. If everything is on the up and up, it doesn't make sense. If there are hidden wheels, though, I'm not sure they make sense either. Just what is Treasury up to?"

Speaking for me only

The Web page here. The Executive summary here. The Full report here (PDF).

Via John Cole, it turns out life insurance companies are also a lynchpin to the financial system:

The Treasury Department has decided to extend bailout funds to a number of struggling life-insurance companies, helping an industry that is a linchpin of the U.S. financial system, people familiar with the matter said.

Remember the saving the "non-banks" issue? It is front and center here:

d-day complains that:

Allow me to interrupt the great love-fest between liberal foreign policy bloggers and Bob Gates by stating the obvious - isn't the fact that the Pentagon budget is increasing, um, THE PROBLEM? And considering that the media-Congressional complex will characterize any effort to put an end to outdated Cold War-era weapons systems as a "defense cut", in the most irresponsible way possible, why aren't we limiting expenditures on a military budget that costs far more than any country's on Earth, depriving us of the flexibility to pursue meaningful social investment?

I have no opinion on the national security implications of the Gates Defense budget but I do have an opinion on calls to cut the Defense budget now - it is wrongheaded. In case anyone has not noticed, aggregate demand is nosediving. Jobs are hemorraging. At least for the next few years, no part of the government budget that stimulates the economy should be cut (though changing expenditures can make a lot of sense, especially changes to more stimulative spending.) Heck, I think I can make a good case for bailing out Detroit for a couple of years as an effective stimulus measure. Once we have gotten through this Depression we are in, then we will need to undertake significant cuts in the discretionary budget (as well as significant tax increases, particularly on the wealthy.) But not now.

Speaking for me only.

Yves Smith writes approvingly of the study on credit risk during the financial crisis that I linked to yesterday and makes a couple of points that are probably familiar to everyone following the financial crisis but are worth repeating--repeatedly--because Geithner and co. and their supporters seem to be getting everything so wrong.

1) Prior to the financial crisis, there was a "gross underpricing of risk"; 2) The plummeting value of assets represents a "return to rationality," so what we're seeing is NOT, as Geithner and co. argue, an irrational flee from risk or a fire sale.

In sum, as I wrote yesterday: toxic assets, toxic after all.

This aspect of the Geithner Plan is not one I had considered -- turning the FDIC into AIG:

The F.D.I.C. is insuring the program, called the Public-Private Investment Program, by using a special provision in its charter that allows it to take extraordinary steps when an “emergency determination by secretary of the Treasury” is made to mitigate “systemic risk.” Simple enough, but that language seems to bump up against another, perhaps more important provision. That provision clearly limits its ability to borrow, guarantee or take on obligations of more than $30 billion.

MORE . . .

If you support the Geithner Plan, it has to be based on the premise that the "toxic assets" held by banks are worth much more than the market is willing to pay for them now. Thus, Geithner Plan supporter Brad DeLong writes:

[G]overnments should undertake additional measures to boost financial asset prices . . . It is this point that brings us to US Treasury Secretary Timothy Geithner’s plan to take about $465 billion of government money, combine it with $35 billion of private-sector money, and use it to buy up risky financial assets. The US Treasury is asking the private sector to put $35 billion into this $500 billion fund so that the fund managers all have some “skin in the game,” and thus do not take excessive risks with the taxpayers’ money. Private-sector investors ought to be more than willing to kick in that $35 billion, for they stand to make a fortune when financial asset prices close some of the gap between their current and normal values. . . .

(Emphasis supplied.) What is the basis for DeLong's assumption that these "toxic assets" are undervalued? He does not say. And if they are not, then what? And even if DeLong's assumption is true, what is the economic purpose of this plan? DeLong posits:

President Obama's approval ratings are at 66% according to the latest NYTimes CBS poll. However, 58% disapprove of his policies regarding the financial crisis

By contrast, a 47% plurality approve of aid to the auto industry while only 38% disapprove. I assume President Obama, Secretary Geithner and Obama economic advisor Lawrence Summers really believe their plan is the right thing to do. It is incumbent upon them to explain why they think so to the American People. I think it is a terrible plan. But it does not matter what I think. The Obama Administration owes the country some explanations for why so much more taxpayer money should go to the banks via the Geithner Plan. So far, the explanations have been quite unconvincing.

Speaking for me only

George Soros says that not only are banks "seriously underwater" but, more importantly, that toxic assets are "still declining in value."

Worse, Soros argues that the recent change from mark-to-market rules--which gives banks significant judgment in gauging the prices of investments on their books--will "keep the zombie banks alive...and sap the energies of the economy."

A critical mass of highly credible voices--Krugman, Soros, etc--is emerging around the idea that the toxic asset shell game will only prolong the recession and quite possibly turn it into depression. Is anyone in the Obama administration listening?

Jeffrey Sachs writes:

Cynics believe that the Geithner-Summers Plan is exactly what it seems: a naked grab of taxpayer money for Wall Street interests. Geithner and Summers argue that it's the least bad approach to a messy situation, in which we need to restore banking functions but don't have any perfect ways to do that. If they are serious about their justification, let them come forward to confront their critics and to explain to the American people why the other proposals are not being pursued.

Let them explain the hidden and not-so-hidden risks to the American taxpayer of the plan that they have put forward. . . . So far Geithner and Summers tell us that their plan is the only option, but without a word of further explanation as to why.

(Emphasis supplied.) Precisely.

Speaking for me only

That's according to a new study from Joshua D. Coval, a professor of Business Administration at Harvard, and Princeton economist Jakub W. Jurek.

Coval and Jurek write that the prices of toxic assets reflect fundamentals and that the low prices are not--as Geithner and Treasury argue--the result of "fire sales."

"Policies that attempt to prevent a widespread mark-down in the value of credit-sensitive assets," Coval and Jurek write, "are likely to only delay – and perhaps even worsen – the day of reckoning."

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