Wall Street Circles the Drain
posted by Dave Hoffman
Reflecting on today’s astonishing run on the bank, Gordon Smith writes:
The big issue, going forward, is how the events of this year reshape our regulatory system. In a decade, will we look back on Bear Stearns, Frannie, and Lehman — oh, and have you been paying attention to the problems at WaMu? — in the same way that we look back on Enron?My guess: no. Enron will be too modest an analog. By the time the dust settles, the New Deal will seem the more apt comparison.
The. New. Deal. Friends, it’s time to go to the mattresses. And put your money there. Have you read this color commentary on the mood up in NYC? Or this catch from the dealbreaker? “[T]hey are saying that AIG has asked the Federal Reserve for some kind of emergency bridge loans. Can the Fed lend to an insurance company?” (More here.)
It’s pretty fortunate that the political blogosphere, which, you know, is much more substantive and issue-oriented than the mainstream press, is all over the story of the rapid collapse of the US financial industry. Indeed, of the top twenty most recent posts at Instapundit and the Daily Dish, only seventeen are explicitly about presidential politics! And one is about the financial crisis (though, to be fair, Reynolds does put a dig in against Obama.)
I myself don’t know what to think. Larry Ribstein thinks that it means the end of large corporations managing financial risks. Is that the problem – bad governance? Or is this a mass psychology problem subject to Nudge-like fixes? The question I have about Larry’s conception of the problem is that it doesn’t explain firms like Goldman, which appear to be surviving the crisis with little hint of major trouble. The goal for policy makers shouldn’t be just to focus on what’s gone wrong, but what hasn’t: what makes Goldman’s corporate culture so superior to the rest of the Street’s?
That’s is a discussion we should have next week. In the meantime, let’s try to survive tomorrow’s opening bell.
[Update: You think I'm a chicken little? Alan Greenspan said the following earlier today:"''I can't believe we could have a once-in-a-century type of financial crisis without a significant impact on the real economy globally, and I think that indeed is what is in the process of occurring.' The former Federal Reserve chairman also predicted that the financial crisis would see the failure of more major financial institutions, even as embattled Wall Street investment giant Lehman Brothers scrambled to find a buyer. "]
(Image Source: Wikicommons)
September 14, 2008 at 11:56 pm
Posted in: Bankruptcy
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Responses (5)
Bruce Boyden - September 15, 2008 at 1:09 am
From the Times article: “It was, by all accounts, a day unlike anything Wall Street had ever seen.”
Hmm. Including October 29, 1929?
A.J. Sutter - September 15, 2008 at 5:08 am
When you refer to “the New Deal” as the more apt comparison, do you mean FDR’s programs, or the Depression itself? If you mean FDR’s programs, could you please explain what they have in common with Enron fraud and the Lehman situation, for example?
As for Allan Greenspan, did the ABC interviewer happen to mention that the subprime industry grew up during AG’s tenure? (Here in Japan, we saw only AG’s jaw-dropping sound bite, carried on some local and cable news shows.)
Markets Always Work - September 15, 2008 at 8:49 am
No new New Deal…the markets will solve this– they always have in the past. Government intervention is always a bad idea. Mellon said it best: liquidate, liquidate, liquidate.
david hoffman - September 15, 2008 at 11:26 am
The New Deal phrase came from Gordon, and I am pretty sure he meant (and I certainly meant) the regulatory response. In both cases, we’ve got a crisis that seems to expose some pretty systemic weaknesses in our system of financial regulation, leading to cascades of failure.
anon - September 16, 2008 at 8:53 am
“Markets always work”, huh?
It seems a little late for dogmatic adherence to a philosophy that seems so obviously flawed. Did the markets “solve” the great depression? Do markets work when government accepts business risk but business keeps business profit? Try to get any medical care recently?
Seems to me that the Reagan revolution is on its death bed. 1980-2008
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