But then things cooled down. Treasury note yields and mortgage bond yields came down a little to end the week, signaling that maybe markets weren’t tired of government debt after all and maybe the Fed’s efforts to keep interest rates low still had some punch. And a couple of astute economic observers expressed to me in emails that frankly, the fears were overblown to begin with. Interest rates on long-term Treasuries simply do not point toward a nervous market. Yes, yields are up from the ridiculous lows that prevailed during the darkest days of the financial crisis. That’s to be expected; people wanted to be in the safest harbor available back then and were willing to accept basically nothing in return for the ability to hold U.S. government bonds. But by comparison with basically any other point in the past thirty years, things look pretty solid.

Anyway, if you need more convincing that inflation and debt levels aren’t something to be pulling your hair out over right now, take it from an economics Nobelist:

[I]t’s hard to escape the sense that the current inflation fear-mongering is partly political, coming largely from economists who had no problem with deficits caused by tax cuts but suddenly became fiscal scolds when the government started spending money to rescue the economy. And their goal seems to be to bully the Obama administration into abandoning those rescue efforts.

Needless to say, the president should not let himself be bullied. The economy is still in deep trouble and needs continuing help.

Yes, we have a long-run budget problem, and we need to start laying the groundwork for a long-run solution. But when it comes to inflation, the only thing we have to fear is inflation fear itself.

There you have it.

There’s plenty of evidence to suggest prices should be falling. In industrialized countries, storage tanks are overflowing, with enough supplies to cover 62 days of use, about 10 days more than usual. Economic weakness continues to depress world demand, which is on track to fall for the second consecutive year. And oil-producing countries, while restraining output, are adding to production capacity. New Saudi Arabian wells coming on line this year will exceed the entire production capacity of Texas.

That first data point — overflowing storage tanks — is all about contango. That is, the price of oil for future delivery is higher than the current price; markets think oil will be more expensive in the future. The natural thing to do in such a circumstance is to buy oil now and store it until later. This is more cost effective than usual, given the levels of current interest rates.

What about the broader story — that economic fundamentals don’t justify the increase? Well, oil prices are expectations driven. It’s a scarce commodity, and supply can’t respond immediately to demand. Early this year, demand forecasts were tumbling even as production remained elevated, a holdover from the 2008 price spike. These dynamics have changed sharply. While the global economy remains depressed, the outlook is considerably more positive than it was back in January. Meanwhile, the economic collapse and credit market freeze shut down many of the efforts to gear up exploration and production which had been begun last summer. Market fundamentals are pointing toward a higher price.

So, too, are financial conditions. Low interest rates and a falling dollar are generally good for an American recovery, but both also tend to support oil prices. There’s a difficult balance to be walked there. Rising oil prices act like a large tax increase on American consumers, which is bad news for the economy. Rising crude prices are like a parachute attached the back of the American economy; the faster we go, the more that parachute exerts a drag. It’s tough to get up to speed under such circumstances.

Senior administration officials are considering the creation of a single agency to regulate the banking industry, replacing a patchwork of agencies that failed to prevent banks from falling into the worst financial crisis since the Great Depression, sources said.

Bloomberg, today:

House Financial Services Committee Chairman Barney Frank ruled out creating a single U.S. bank watchdog similar to the U.K.’s Financial Services Authority as part of an overhaul of regulations.

Failure to communicate? Not necessarily. Both the administration and Frank seem interested in combining the responsibilities of the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the Federal Deposit Insurance Corporation into a single banking regulator, and both seem to favor a separate regulator, likely the Federal Reserve, to focus on systemic risk. The difficult question, as I see it, is whether this division makes sense.

On the one hand, two separate regulators overseeing the health of the banking system provides an opportunity for redundancy. Should the Federal Reserve fall into the hands of a laissez-faire ideologue (difficult to imagine, but play along) then a separate regulatory agency overseeing banks could take steps to shore up capital buffers and limit risky activities at systemically important institutions. The system might have functioned this way before the current crisis, were banks not in a position to shop among multiple regulators (OCC, OTS, FDIC), which created an incentive for the regulatory bodies to compete for banks.

On the other hand, having dual regulatory agencies creates the potential for a lot of buck-passing. Pulling away the punch-bowl is not popular. Bubbles make a lot of people very (though temporarily) rich, and those people will command a lot of political influence, which will be marshaled to fight any attempt to enforce sobriety. The systemic regulator could be tempted to declare problematic issues the purview of the banking regulator, and vice versa.

It’s important to have a place where the buck definitively stops, and a few carcasses which can be nailed to the wall in the event of a major regulatory failure. That’s currently difficult to do, because so many potential overseers fell down on the job. Deny the regulator any scapegoat, and the regulator is more likely to do his job effectively.

Of the opportunities for tomfoolery available, the one that generated the most hand-wringing was the prospect for self-dealing. It was felt that banks might submit a small portfolio of assets for auction, while also signing up to join a bidding partnership. A bank could then bid up the price of its own assets using the government subsidy as support. This would help the bank in two ways. The government subsidy would allow the bank to overpay for assets and still have the opportunity to enjoy a gain on the portfolio, and the high price established for the loans would extend to all similar assets on the bank’s balance sheet, making it look much stronger financially than it actually is.

Yesterday, The Wall Street Journal reported that banks were basically asking for the explicit ability to do this, as a condition for them to participate in the program at all. This led The New Republic’s Noam Scheiber to ask whether PPIP was actually necessary at all. According to a story in The Journal today, a growing number of people in Washington are concluding that no, it really isn’t.

I am very much inclined to agree. The world has changed quite a bit since the plan was introduced. Markets have risen, making it easier for banks to raise private capital, and the results of the stress test seem to have been broadly accepted. In this climate, many of the healthier banks seem to be able to recapitalize themselves privately. Devoting TARP resources to such banks would be a poor use of increasingly scarce funds — essentially, government handouts to firms that no longer need the help.

Instead, it seems like a better idea to hold those funds in reserve, to be used if the more troubled banks, like Bank of America or Citigroup, cannot find their way out of their messes without additional support. While $100 billion would not be sufficient to shore up the banking system as a whole without a lot of FDIC-facilitated leverage, $100 billion is enough to stabilize one or two large banks. Having come this far in improving faith in the banking system and bolstering confidence in the leadership at the Treasury department, it seems unnecessarily risky to try and move forward with the opaque and uncertain PPIP auctions. Time to consign that particular policy to the scrap heap.

This, then, is good news:

General Motors said Thursday that a key group representing many of its largest bondholders had accepted a proposal offering up to a 25 percent stake in exchange for not opposing G.M.’s reorganization plan.

In a regulatory filing, G.M. also filled out many of the details of the reorganization plan, crafted under the eye of the Treasury Department.

Under the terms of the deal, G.M.’s bondholders would receive a 10 percent stake in the newly reorganized carmaker. They will also receive warrants to buy an additional 15 percent of a new G.M. if the company rises to a certain level of value.

It’s really quite a bit better for all involved for this to proceed quickly. Given the complexities of the GM case, a swift turnaround is still not a sure thing, but this obviously helps.

The other piece of goodish news comes from the Commerce Department, which announced a jump in April durable goods orders of 1.9 percent — the largest increase since December of 2007. But let me quote the Bloomberg write-up of the release:

The 1.9 percent increase reported by the Commerce Department today in Washington was the largest since December 2007, and followed a revised 2.1 percent drop in March that was more than twice as large as previously estimated.

Catch that? April’s increase looks so big because March’s decline was much worse than originally estimated. Taking into account all the revisions, new orders in April are actually a little lower than the new orders recorded in February, on a seasonally adjusted basis. So while the splashy release is good for confidence, the true economic picture is more complex than is being intimated.

There is a line of thought that’s been circulating recently among the conspiracy-minded, that the government has been systematically reporting better than actual advance data results, only to revise the data down in subsequent releases. I’m very skeptical of this hypothesis; as a former government stats guy, I don’t even know how this would happen. Most stats gathering is done in a very bottom up fashion. Still, the size of recent revisions indicates that one can’t get an accurate picture of the changing economy without digging beneath the headlines.

Then there’s the argument from the left that I shouldn’t have signed the bill that got rid of the Glass-Steagall law because that enabled banks and investment banks in effect to merge their functions.

And then there’s the argument that I make, which is that I should have raised more hell about derivatives being unregulated. I believe the last one is by far the most valid, although I don’t think that the Congress would have permitted anything to be done because Alan Greenspan was against it.

Let us hope that the powers that be reflect on this as they consider what new authorities to grant the Federal Reserve as part of a new regulatory reform bill. For a very good reason — to protect the credibility of the central bank as an inflation fighter — the Fed has a great deal of statutory autonomy. That this authority should extend to virtual veto power over regulatory reform based merely on expressed preference is an unpleasant thought.

Obviously, Clinton had a different Congress with which to work. On the other hand, the previous and current Congresses’ reluctance to act on potentially divisive issues had led to an enormous expansion of activity at the Fed. Things needed to be done, and so the Fed, with the blessing of the executive branch, did them. A license to protect the value of the currency is not a license to take the lead in all things economic. Time for Congress to begin shaping up and doing its job.

Now, S&P said that America is in no immediate danger of a downgrade (a 100 percent debt ratio would have to be sustained for for some time to earn such treatment), and Moody’s noted today that America’s AAA rating was safe. And while Treasury notes have fallen through the week, indicating that markets are worried about the amount of debt the government is unloading on private markets, the latest debt auction  — of $35 billion in five-year notes — enjoyed the highest level of demand in three months.

There are a number of things going on here.

One is that private investors are losing their appetites for government debt — which they ran to in the flight for safety that characterized the past nine months — just as the government is pouring a great deal of new debt into the market. Another is surely rising levels of nervousness among investors waiting to see how large sovereign debts are going to be paid. And a third is the fear that efforts to juice the American economy will lead to inflation. This is certainly a possibility. But the language being used to talk about this possibility is growing increasingly outlandish. John Taylor, for instance, has been widely mocked today for making a basic arithmetic error in arguing that the threat of a seven percent annual rate of inflation over the next decade is greater than that posed by the credit crisis and current downturn. But Marc Faber takes the cake:

I am 100% sure that the U.S. will go into hyperinflation.

Hm. People seem not to understand that seven percent annual inflation, or 20 percent annual inflation (which would be quite a bit more damaging) do not count as hyperinflation. Countries experiencing hyperinflation, like Zimbabwe, suffer monthly rates of inflation in the millions, billions, trillions, and quadrillions. Really. An American hyperinflation would be impossible without a complete collapse in its governing institutions. Faber may as well have said that he is 100 percent sure America will be seized by a dictator or invaded and left in a state of near-anarchy.

It’s quite fair to worry about how we should pay our debts. But there is not much indication that current monetary and fiscal policies pose a serious threat to future economic health, given reasonable expectations about future economic growth and tax policy changes.

What does this all mean? Well, it means that GM is headed for bankruptcy. The government will try to push for a speedy reorganization and sale, but the company is a big, complicated beast, and so a standard Chapter 11 process, taking several years, could instead be the result. It’s difficult to sell cars while in bankruptcy (one presumes), so  a protracted process could ultimately lead to liquidation — that is, selling off GM assets down to the last lugnut-affixing robot.

The main problem is that the government is providing the bulk of the bankruptcy financing (some $50 billion), which could give it as much as a 70 percent stake in the new automaker. This is tricky business. For one thing, it means that if the reorganized company doesn’t do well, the taxpayers take a big hit. It also means that the government has a big interest in keeping the reorganized firm afloat, which increases the likelihood of political meddling in the industry and continued cash infusions or subsidies. But the real rub is that GM’s obligations are large while its potentially successful sub-units are small. And those potentially successful sub-units will not be successful if they are saddled with too many of GM’s large obligations. So, for this to really work, the government has to swallow a lot of GM’s baggage and let free a new, trimmed down, unburdened GM. If that new company does well, the equity stake will have value and taxpayers will get back some or most of their investment. If it doesn’t — and in this economy, it will be swimming up a waterfall — then the government will have shelled out tens of billions of dollars just to prop up GM for a matter of months and delay the inevitable reallocation of workers and capital away from an utterly failed enterprise.

High risk, tiny chance of breaking even. What’s not to like?

They [Geithner's advisers] decided to “let Tim be Tim” and accepted the fact that his strength wasn’t giving a speech in front of a bunch of flags. Rather, they let reporters see him in off-camera, pen-and-pad settings, where he fielded questions with the confidence that his staff saw behind the scenes. He aced an interview with PBS’s Charlie Rose, thriving in a relaxed setting where he could explain issues at length.

Perhaps most important, the staff realized the importance of making sure other parts of the government knew all the nuances of what was being decided. Treasury officials now meet with White House chief of staff Rahm Emanuel three or four times a week, so top officials can coordinate and trade notes about views on Capitol Hill.

Although Obama never lost confidence in one of his earliest Cabinet picks, a turning point for Geithner came during a seven-hour marathon meeting at the White House on March 15. The president’s top aides could see that he had thought through all the options and had thoughtful, authoritative answers to all their questions.

Management of the secretary has no doubt improved, to positive effect. He’s gotten used to the job, he has more help at Treasury, and the initial bungles and miscommunications that characterized his disastrous first weeks have faded as the White House has understood the need for better Treasury PR. If I had to guess, I’d say that these factors account for maybe 15 percent of the recovery in Geithner’s reputation.

The balance? Economic conditions mostly outside of his control. In the first month of his tenure, as crucial policy decisions were being rolled out one after another, the economy was getting worse at an increasing rate. Worst of all, it was doing it in a very visible fashion; no public appearance went without the inclusion of a stock ticker in a bottom corner of the television screen, and in those weeks stocks were always down (usually by a lot). No longer. Certainly, administration actions — including management of Geithner — have contributed to confidence. But with stimulus only beginning to trickle out and the secretary’s toxic asset program still on the drawing board, one has to attribute most of the appearance of green shoots to aggressive monetary policy and the natural progression of the recession. Both of which have redounded considerably, to Geithner’s benefit.

Should markets once more take a nosedive, attention will once again focus on the failures, real and perceived, of the Treasury secretary. Better communication strategies won’t keep the knives from coming out.