Saturday, August 1, 2009

Being David Brooks III

Conservative columnist, David Brooks, whom I have followed for years and whose columns I often appreciate, wrote a thoughtful piece on Bernanke and the Fed that is worth considering, "Wise Muddling Through." I have written of Brooks here before.

Brooks writes:

Their decision not to bail out Lehman Brothers was based on a complete misreading of the economic psychology. Paulson was sick of doing bailouts. He seems to have had some sort of intuitive moral sense that it was time for some bank to pay for its mistakes. Bernanke and Geithner went along, and none of them anticipated the meltdown that followed.

But this is not a story of failure. It’s a story of effective muddling through. Bernanke & Co. never really got control of events. But they did avert disaster and committed only a few big blunders. In the real world, that counts as a job well done.
As I see it, there are two things wrong here:

First, it is very difficult to speak about another's moral intuition, especially when that one was over Goldman Sachs and when he and Geithner, who was over the NY Fed, have such cozy relationships with Wall Street bank executives.

Morality is shown by consistent actions and decisions. Paulson insisted that Merrill Lynch and Bank of America merge, giving the latter a pretty hefty bailout. BofA would probably be insolvent without it, as well as Goldman Sachs.

Second, it was their lack of complete oversight of these banks over many years that led to the crisis, not just merely allowing Lehman to fail, but allowing AIG to essentially become a Hedge Fund that insured Goldman Sachs, becoming too big too fail.

While Brooks is appreciated, I am with Jack Bogle, Nassim Nicholas Taleb, Arianna Huffington and Eliot Spitzer. Their words and actions have mattered most in this economic crisis.


Shalom P. Hamou said...

It proves that the ominous fate of this economy is Keynes' Liquidity Trap.

Its consequences are a new, bigger Crash causing, this time, a real Great Depression II.

A turbulence in fluid mechanic is a chaotic state of a liquid. It Owns Most of the Proprieties of The Liquidity Trap, Origin of The Crash.

Before The Crash:

Preparing for the Crash, The Age of Turbulence. Proposes a way to profit from The Crash.

Using the yield curve as a predictor that strategy covers Treasuries, Corporate Bonds, Minerals (Oil, Precious Metals and Base Metals.) and Stocks.

Its aim is to profit from both the Asset Price Bubble and Irrational Exuberance and The Crash and Economic Depression that will necessarily ensue.

It tries, and for the time being very profitably, to accomplish Alan Greenspan Mission Impossible:

"That is mission impossible. Indeed, the international financial community has made numerous efforts in recent years to establish such oversight, but none prevented or ameliorated the crisis that began last summer.

Much as we might wish otherwise, policy makers cannot reliably anticipate financial or economic shocks or the consequences of economic imbalances.

Financial crises are characterised by discontinuous breaks in market pricing the timing of which by definition must be unanticipated - if people see them coming, then the markets arbitrage them away."


The clear evidence of underpricing of risk did not prod private sector risk management to tighten the reins.

In retrospect, it appears that the most market-savvy managers, although conscious that they were taking extraordinary risks, succumbed to the concern that unless they continued to "get up and dance", as ex-Citigroup CEO Chuck Prince memorably put it, they would irretrievably lose market share.

Instead, they gambled that they could keep adding to their risky positions and still sell them out before the deluge. Most were wrong."

Alan Greenspan
The Age of Turbulence: Adventures in a New World [Economic Order?].

Shalom P. Hamou said...

But what do we do After The Crash?

I propose a plausible alternative solution to the Depression: I designed a System that will allow us, when The Crash will come, to get out of Credit Based Free Market Economy, Capitalism, and transfer to my Adjusted Credit Free, Free Market Economy and Abolish the FED:

To participate in our new economy you need to Enter Your €5 in The Cra$h R€gi$t€r. Before The Crash.


"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.

It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice.

But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary.


A regulation which obliges all those of the same trade in a particular town to enter their names and places of abode in a public register, facilitates such assemblies. It connects individuals who might never otherwise be known to one another, and gives every man of the trade a direction where to find every other man of it.


A regulation which enables those of the same trade to tax themselves in order to provide for their poor, their sick, their widows and orphans, by giving them a common interest to manage, renders such assemblies necessary."

Adam Smith
June 5th, 1723 – July 17tn, 1790
An Inquiry Into the Nature and Causes of the Wealth of Nations.
Inequalities Occasioned by the Policy of Europe.
March 9th, 1776

Buy Now The Tract That Will Be Published September 17th, 2009.

You will enjoy my popular articles:

Ron Paul vs. Bernanke.

Ben "Systemic" Bernanke.

Judith Ellis said...

Wow, Shalom! (I love the name, by the way. Peace is needed the world over.) I so appreciate your words here and will definitely look forward to reading your tract.

If you have not read the work of Nassim Nicholas Taleb, I'm sure that you will find him most interesting. Do pass through again, sir, and leave your thoughts. They're very much appreciated.

Regarding Ron Paul, while I respect many of his views, I have also wondered if he is a bit too extreme on others. But I'll read the link you have given here on he and Bernanke. I always reserve the right to change my views and be enlightened. Thanks for your comments.

Judith Ellis said...

By the way, Shalom, although I am not an economist as yourself and others friends, I have been writing here and elsewhere for some time now about banks who win on the front end and back end and the people lose. This has become increasingly obvious to me with each government bailout of Wall Street banks. I have written here of Greenspan and The Fed. Let me know what you think. I have also just forwarded your website to a couple of prominent friends in finance who are on the edge, though highly regarded and respected.

Bob said...

We're lucky to have had Paulsen, Bernanke, and Geithner in place when they were. The nation and the world just barely averted a catastrophe. We're especially lucky about Paulsen: imagine if Bush had picked a Treasury secretary as incompetent--or as doctrinaire--as so many of his appointees.

Judith Ellis said...

I'm not altogether sure about that, Bob. But I hear you. I think Nassim's take on the situation is probably a bit more accurate. Is it not asinine to think that the same guys that brought us to near collapse will now bring us out and we will not see such again? With regards to the many incompetent people of the former administration, it seems that Paulson, Geithner, Summers, and Bernanke helped to get us here. Am I missing something?