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Banking collapse promises to make the widespread financial misery caused by coronavirus even worse: Economist

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Millions of Americans suffered long-term financial pain because of the Great Recession and the crash of September 2008. Now, the coronavirus pandemic is inflicting additional pain on millions of Americans, and UC Berkeley law professor Frank Partnoy — in a sobering article for The Atlantic’s July/August 2020 issue — warns that another banking crisis is a strong possibility.

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“After months of living with the coronavirus pandemic,” the 53-year-old Partnoy explains, “American citizens are well aware of the toll it has taken on the economy: broken supply chains, record unemployment, failing small businesses. All of these factors are serious and could mire the United States in a deep, prolonged recession. But there’s another threat to the economy too. It lurks on the balance sheets of the big banks, and it could be cataclysmic. Imagine if, in addition to all the uncertainty surrounding the pandemic, you woke up one morning to find that the financial sector had collapsed.”

Partnoy goes on to explain why he fears that possibility. Banks, according to Partnoy “learned few lessons from” the “calamity” of the “2008 crash” — and “new laws intended to keep them from taking on too much risk have failed to do so. As a result, we could be on the precipice of another crash, one different from 2008 less in kind than in degree. This one could be worse.”

In 2010, Partnoy notes, Congress passed the Dodd-Frank Act “to prevent the next crisis.” But one financial instrument that, according to Partnoy, has become problematic is what is known as a CLO or “collateralized loan obligation” — not to be confused with a CDO or collateralized debt obligation.

“After the housing crisis,” Partnoy notes, “subprime CDOs naturally fell out of favor. Demand shifted to a similar — and similarly risky — instrument, one that even has a similar name: the CLO or collateralized loan obligation. A CLO walks and talks like a CDO, but in place of loans made to home buyers are loans made to businesses — specifically, troubled businesses. CLOs bundle together so-called leveraged loans, the subprime mortgages of the corporate world. These are loans made to companies that have maxed out their borrowing and can no longer sell bonds directly to investors or qualify for a traditional bank loan.”

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Partnoy observes that CLOs have been “praised by Federal Reserve Chair Jerome Powell and Treasury Secretary Steven Mnuchin for moving the risk of leveraged loans outside the banking system.” But according to Partnoy, that doesn’t mean that they aren’t risky.

Partnoy wraps up his Atlantic article on a troubling note, warning that the financial problems resulting from the coronavirus pandemic could become even worse if large banks are allowed to take dangerous risks.

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“If we do manage to make it through the next year without waking up to a collapse, we must find ways to prevent the big banks from going all in on bets they can’t afford to lose,” Partnoy explains. “Their luck — and ours —will at some point run out.”


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2020 Election

Trump aides frustrated by his ‘nonsensical’ Biden attacks in Ohio: AP reporter

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During a segment on MSNBC's "Morning Joe," Associated Press White House correspondent Jonathan Lemire stated that aides close to President Donald Trump thought the president made some good points about the U.S. economy on Thursday -- only to have his message overlooked when he attacked former Vice President Joe Biden.

Speaking with co-host Willie Geist, Lemire said there were other problems with the Ohio visit -- including Republican Gov. Mike DeWine being unable to attend because he tested positive for COVID-19 -- but Trump stating Biden "hurts God" made the economic points the president made secondary in a state where he needs votes.

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2020 Election

Expert: Trump playing ‘whack-a-mole’ in attempt to salvage states he should be winning

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A top political analyst says President Donald Trump seems to be flying blind as he heads toward an electoral loss.

Dave Wasserman, the U.S. House editor for the Cook Report, told MSNBC's "Morning Joe" that demographic changes had turned formerly reliable red states into competitive congressional races, and that same dynamic had made Trump's re-election campaign even more challenging.

"Pennsylvania, Florida and North Carolina, if you talk to the Trump data people they'll hang their hat on the gap getting narrower in those states," Wasserman said. "What's happening is that a lot of the older voters who, for lack of a better term, are exiting the electorate. They are disproportionally registered Democrats who are conservative and voted for Trump in 2016. Yes, the registration gap is narrowing, fewer voters are registering to vote this year than did in 2016 because we're in a pandemic. That doesn't mean the states are getting more favorable to Trump."

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US COVID death toll projected to hit almost 300,000 by December

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An influential novel coronavirus pandemic model now projects that deaths from the disease in the United States could hit almost 300,000 by the start of December.

NPR reports that researchers at the University of Washington's Institute for Health Metrics and Evaluation say that the United States is headed toward a grim fall in which COVID-19 deaths will nearly double from their current level of 160,000 in the next four months.

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