The mad experimenters: Part 1, being still breathing is winning
By: David A. Smith
Although we are far from recovered, we have the giddy consolation of knowing we’re not dead yet, and that is grounds for celebration, at least to the extent we now have the luxury of debating which of those crazy risks we took and big bets we made were necessary.
We’re here to hear about your big brass bets
Leave it to the Wall Street Journal to review the last year’s wild ride:
It was only a year ago published September 14 – Ed.] that the world economy was enveloped in a financial panic of such dimensions that, if one believes Federal Reserve Chairman Ben Bernanke, it threatened to produce a calamity as bad as the Great Depression.
You have something against calamities?
I believe it did; and said so throughout the sequence.
Today, the economy is far from vigorous.
We’re still shedding jobs.
Unemployment remains high. Huge swaths of the financial system remain on government life-support.
Yes, such as the entire domestic residential housing financial system, among others.
But the global recession appears over –
That’s the economists’ definition: namely that the economy is not actually shrinking. But from where I sit, employment is falling, and a lot of capable people I know who’d like to work are out of work. That’s hardly cause for cheer.
What, you can’t take a few hundred thousand layoffs, you wimp?
– and now forecasters are arguing over the pace and sustainability of recovery. Leaders of the world economy are breathing an audible sigh of relief, and talking about the “exit strategy.”
Despite Chairman Bernanke’s brave words a while back – in this selfsame Wall Street Journal – we may talk about exit strategy all we want, but there will be no substantial exit any time soon.
President Barack Obama goes to Wall Street Monday [September 14, 2009 – Ed.], the anniversary of Lehman Brothers’ collapse, to deliver a cautious victory speech.
With Wall Street executives, as well as government officials, in attendance, the president also will admonish “to avoid a return to the practices on Wall Street that led us to the financial crisis and to recognize their obligation to help produce a wider recovery on behalf of the American people.”
Sounds good, I suppose.
If you don’t like “admonish,” how about “chastise”?
With a modicum of hindsight now available, do governments and central banks deserve credit for preventing catastrophe? The early verdict from most scholars, executives and government insiders is yes. [What are bloggers, chopped liver? – Ed.]
How about bloggers? I said yes at each stage:
March 24, 2008, the shotgun marriage of Bear Stearns to JP Morgan Chase: Banking on value.
April 22, 2008, explanation: Banking on value: the explanation.
April 28, 2008, how the Bear Stearns transaction went down: Anatomy of a coup
September 22, 2008, explaining the Paulson Doctrine(s): Part 1, prevent the second great depression
September 29, 2008, explaining TARP: Bailout or bonanza?
October 20, 2008, converting TARP into preferred-stock injections: Paying your rescuer: Part 1, you *will* do it
January 21, 2009: The GSE’s future: Part 1, we need the eggs
March 23, 2009: The AIG Hearings: Part 1, “Now that we’ve killed all the bomb-makers …”
What, you think that counts as evidence?
On the question of which of dozens of extraordinary interventions — rock-bottom interest rates, surging government spending, billions of taxpayer dollars injected into banks, sweeping government guarantees — made the biggest difference, there’s less agreement.
Sometimes the answer is, All of them.
“It was a period of tremendous experimentation,” says
Mishkin: Sometimes you just have to swipe at the air
Experts say the leading candidates for most-successful moves are those that leveraged the credit and credibility of the
Oh, you think having the global capital markets seize up and throw the financial system into chaos would have been a bad thing?
Getting thrown isn’t such a good idea
The moves shored up rapidly dissipating confidence in the financial system before panic damaged it irreparably, and kept credit flowing while bankers and government officials debated how to rebuild banks’ depleted capital.
Yes.
Specifically, the Treasury rushed last fall to shield money-market mutual funds from what resembled a 19th-century bank run, and the Fed bypassed banks and markets by giving loans to credit-starved industrial companies.
Nineteenth century? Try the twenty-first century run on Britain’s Northern Rock.
Twenty-something billion pounds’ later, you’re all satisfied
Never quite clear whether they had all the authority to do all these things, but they did them and everybody decided that the authority was, yea verily, actually there.
Then the government force-fed capital to the banks and, perhaps more importantly, guaranteed nearly all new bank borrowing so banks wouldn’t all shrink simultaneously.
Actually, it’s good for you
Not just our government – the Bank of England, the European Central Bank – they all moved.
More recently, the Treasury’s “stress tests,” to the surprise of their many critics, allowed big banks to take steps crucial toward renewed health.
Stress test doesn’t mean “works in all possible scenarios.” At least, not to anybody other than an engineer.
Stress? You call that stress?
One sign of success is the parade of people stepping up to take credit for what seemed, just a few months ago, an unpopular bailout of Wall Street. Mr. Bernanke, in speeches and interviews, recites the litany of Fed innovations. Former Treasury Secretary Henry Paulson is finishing a book that highlights the political risks he took last year to save the economy. Mr. Obama and Treasury Secretary Timothy Geithner emphasize steps taken since January, a case that Treasury will detail in a report to be issued Monday that it calls “The Next Phase.”
Success has a hundred fathers. I’ve always thought it was the Bernanke-Paulson-Geithner troika, which is why Mr. Geithner, despite his embarrassing and possibly unforgivable tax lapses, was the right man for the Treasury job.
A big question will be debated for decades: Whether Mr. Bernanke and Mr. Paulson could or should have kept Lehman Brothers from bankruptcy a year ago this month.
Yes – that’s the known unknown.
I know I don’t know economics
By a 3-to-1 margin, three dozen economists surveyed by The Wall Street Journal reject the Bernanke-Paulson claim that they were legally impotent as Lehman teetered.
Count me among the super-majority; I am sure the authority could have been found.
Where did I put that statutory authority?
Lehman’s collapse coincided with and contributed to a classic panic, breeding such distrust among banks that they were reluctant to lend even to each other. In the weeks that followed, the Fed and Treasury leapt to keep insurance titan American International Group Inc. from following Lehman into bankruptcy proceedings.
Yes, that’s the case for not letting Lehman collapse – we had to prop up the much bigger AIG.
There are dissenters.
In Too many powers: chasing the bus, I observed that having gained authority to remake the GSEs with a wave of their magic wands, Treasury and the Fed found the capital markets expecting them to do so, so the conveying of a power made using that power inescapable.
“They said [to Congress]: ‘If you don’t do this, and even if you do, it could be the next Great Depression,’” he says. “Those things, I think, were the worst.”
Add to that Mr. Paulson’s rhetoric – equivalent to shouting Depression in a crowded CDS marketplace – and the unthinkable became inevitable.
Do I hear the voices of unlearned critics?
Mr. Bernanke scoffs at that. A “strong and unprecedented international policy response…averted the imminent collapse of the global finance system,” he said recently. Mr. Paulson has said he sees the situation similarly. Mr. Geithner, meanwhile, seeks credit for what was done last year, while he headed the New York Federal Reserve Bank. He said Thursday that those efforts “succeeded in achieving the vital, but narrow, objective of preventing a catastrophic systemic meltdown.”
Meltdown – it’s a good thing
[Continued tomorrow in Part 2.]
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