I am Irving Fisher
“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.