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.As I see it, there are two things wrong here:
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.
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.
5 comments:
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?].
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.
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.
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.
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?
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