I am Irving Fisher
posted by Nate Oman
“You are a perverse soul,” my office-suite mate told me this morning after I expressed my glee at the fall of Lehman Brothers and the imminent death-by-merger of Merril Lynch. Perhaps, I am just Irving Fisher. Of course, my office-suite mate and I have differing time horizons. She is not that far from retirement and is in that stage of life where every twitch, hiccup, and nose-dive of the market ripples through one’s 401(k). I’m decades from cashing out my retirement savings, and I have to confess that the fall of a major financial institution puts me in a down right jaunty mood.
Sure, the markets already have lost 3%, but what makes me happy is the news that Lehman Brothers threw itself at the knees of the Fed and the Treasury Department over the week end, and Berneke and Paulson looked on in stoney indifference. At last, it would seem, capitalism is going to do what capitalism is supposed to do: Punish those who make bad investment choices. Hopefully, we are in for a bit of short term pain while markets find their bottom and the dead and dying are taken out behind the barn to be shot. On the other hand, once the carnage is over those with money to loan, invest, and spend — and there are lots of them — will come out from hiding in their bunkers with the knowledge that we’ve unwound the risk, and a market that has learned something about the valuation of credit derivatives can move forward. To be sure, the landscape will be utterly changed, but that had to happen any way. Better this way than through a long, slow, expensive process of bailing out the super-rich. This is bad for the financial markets and the real economy may take a hit as well. It is good, however, I think for the long-term political health of capitalism.
I am also frankly skeptical about the notion that we are facing a crisis that will call for New Deal-esque responses. Just a quick reality check: When the New Deal was being put together we had near 25 percent unemployment, roughly 50 percent of all home-mortgages in default, and the GNP contracted by over 13 percent in a single year. This simply IS NOT the second coming of the Great Depression. This is an enormous financial crisis, but one that — as Dave notes in the Greenspan quote in his post — has been having less than catastrophic effects on the economy. It is a big nasty problem, to be sure, but I do not think that it is an apocalypse. Gordon is right, however, that the big question is going to be what will be the regulatory response. This is undoubtedly a bigger event economically than Enron, and the regulatory response to that problem does not give me a great deal of confidence going forward. What I fear is less the markets, than what Congress is likely to do in response. It is the sort of thing that we might want to ask our Presidential hopefuls about, although the chances of a productive discussion on this between now and election day are … low.
September 15, 2008 at 10:25 am
Posted in: Bankruptcy, Contract Law & Beyond, Corporate Law
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Responses (7)
John Armstrong - September 15, 2008 at 11:10 am
I’m also decades out, and I have to say I share your view. The weaker investments will be weeded out, and maybe the housing market will bottom out around the time I’m finally stable enough to get a mortgage and settle in any one place.
That said, I’m still putting the lion’s share of this year’s retirement savings in foreign companies. I’ll not be the last rat off this ship if it comes to that.
Maryland Conservatarian - September 15, 2008 at 11:16 am
“I am also frankly skeptical about the notion that we are facing a crisis that will call for New Deal-esque responses.”
…and since the original New Deal-esque responses were almost always wrong, I would say no crisis should call for such responses.
dave hoffman - September 15, 2008 at 3:39 pm
Nate, I basically agree with you that the relationship between this particular crisis (the last 18 months, at any rate) and the underlying health of the economy is at best unclear. But I think the precautionary principle applies here, to a degree. There is a non-trivial chance of a serious economic downturn – asset deflation coupled with inflation for consumables. That doesn’t mean bailouts are the answer, and I very much share your concern that the regulatory responses are likely to be bad fits. But I’m not nearly as sanguine as you are, obviously.
Do you think you will feel the same way if AIG goes bankrupt before the end of the month?
Nate Oman - September 15, 2008 at 5:10 pm
Dave: I am not sure what to make the precautionary principle in this case, particularlly if it is going to be implimented by the same regulatory geniuses that created Sarbanes-Oxley.
I may well continue to ride the gleefully-watching-the-mighty-humbled buzz if AIG goes under. I am less concerned about the systemic risk posed by bankruptcies than the systemic risk posed by moral hazard and regulatory over-reaction. Hence, if AIG goes under I may feel less sanguine precisely because its bankruptcy would create more pressure for misplaced government action. Of course, as I write this the Dow is down 500 points, so maybe I should get more scared.
My reading of the economic history, however, is that the Great Depression was caused less by investments gone bad and investors jumping from windows than by a misguided contraction in money supply by the Fed. Likewise, the long slow slump of the Japanese economy was caused by a regulatory response geared toward saving investors from the short term pain of falling asset prices.
I think that the question is whether investors run to the mattresses permanently if we let the Lehmans and (perhaps) AIGs of the world die, or if they have the bejesus scared out of them for a while and then come back. I’m betting on the later possiblity. The United States is a friggin’ huge economy and while we have slightly higher than normal unemployment and a couple of quarters of less than steller economic growth, I can’t help but thinking that there are a lot of opprotunities here for a lot of people to make a lot of money. So long as that basic economic reality holds true, then turmoil in financial markets doesn’t necessarily give me the long-term willies. Of course, I could be wrong. We’ll see. It is going to be quite the show.
Pedagogically, however, the timing is perfect. I am teaching asset securitization this week in my commercial law class ;->
Susan - September 16, 2008 at 10:59 pm
Okay. So you’re young. I want to retire next year. And?
loan - January 13, 2009 at 9:19 am
Nice great youir article, I will read next time
loan - January 13, 2009 at 9:20 am
Nice great youir article, I will read next time
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