Questioning the “The Authorities Did a Great Job in the Crisis” Meme

One of the minor aspects of the econoblogger session with the Treasury on Monday (more on that shortly) is that several of the invitees said something along the lines of, “You guys did a great job in the crisis.”

What is disconcerting is how this view has now become conventional wisdom, despite the panicked Fed reaction (being way behind the curve, then overreacting and making 75 basis point cuts the new normal, with the result that short rates are now so low that the Fed is boxed in), denial and failure to investigate the seriousness of looming problems (for instance, Bear’s implosion should have led to a full bore investigation of the credit default swaps market, which would have led straight to AIG); the inconsistent bailout processes; the heinous language and process of the passage of porked-up TARP.

And now we have the aggressive selling of “how well it all worked.” For starters, consider the misleading “banks have paid back the TARP meme.” Yes, thanks to other back door, less visible bailouts, super cheap interest rates, regulatory forbearance (aka, extend and pretend, starting with bank second mortgages and HELOCs). This is simply a shell game, with the banks eager to pay back the TARP for the worse possible reason, so the top brass could escape restrictions on compensation.

An interesting proof of the success of the power-that-be’s PR campaign is the blogosphere silence on a Barry Ritholtz post of Monday, “2008 Bailout Counter-Factual.” I’m what would normally be late to it, but I can’t find another blog in my RSS reader having commented on it.

Barry makes an aggressive case, that none of the bailouts were necessary:

Imagine a nation in the midst of an economic crisis, circa September-December 2008. Only this time, there are key differences: 1) A President who understood Capitalism requires insolvent firms to suffer failure (as opposed to a lame duck running out the clock); 2) A Treasury Secretary who was not a former Goldman Sachs CEO, with a misguided sympathy for Wall Street firms at risk of failure (as opposed to overseeing the greatest wealth transfer in human history); 3) A Federal Reserve Chairman who understood the limits of the Federal Reserve (versus a massive expansion of its power and balance sheet).

In my counter factual, the bailouts did not occur. Instead of the Japanese model, the US government went the Swedish route of banking crises: They stepped in with temporary nationalizations, prepackaged bankruptcies, and financial reorganizations; banks write down all of their bad debt, they sell off the paper. Int he end, the goal is to spin out clean, well financed, toxic-asset-free banks into the public markets.

Thus, Bear Stearns is not bailed out by the Fed. Instead, the FOMC chair tells JP Morgan’s CEO “You have 9 trillion dollars in exposure to Bear derivatives. Instead of guaranteeing you $29 billion for a risk free takeover, we will start preparing a liquidation plan for Bear. And given your exposure to them, we best plan one for JPM too. (and if you don’t like that, you can kiss our ass).”

Tough talk, but the outcome would have been much better: JPM would likely have bought Bear anyway, if for no other reason than to prevent someone else from buying them, and forcing JPM into bankruptcy, to pick up their assets for pennies on the dollar. That would have set a much better tone for future bailout expectations, versus the massive moral hazard the Fed created with the Bear bailout.

Lehman? Prepackaged bankruptcy, less disruptive.

AIG ? There never was an implicit government guarantee that all counter-parties dealing with AIG-Financial Products — a giant leveraged structured finance hedge fund hiding under the skirt of the regulated insurer — would be made whole. But the Bush/Paulson/Bernanke bailout created one. Instead, AIG-FP should have been carved out for dissolution/wind down, while the insurer could have continued to exist on its own. AIG would have had the liability for the government’s costs, but the counter parties? They would have gotten zero. If you go to Vegas and shoot craps in the alley way behind the casino, don’t expect the gaming commission to collect your winnings. But that is what we did with AIG.

Fannie & Freddie: Two more crappy banks that should have been wound down. These were publicly traded companies that were guaranteed lower interest rates — not an infinite backing from taxpayers. They should have been wound down like all any insolvent bank. Today, they serve as the mechanism for backdoor bailouts of the rest of the wounded banking sector.

Yves here. Readers may take issue with many of Barry’s claims, but consider a few not well understood factoids. Re the Bear bailout, Bear had substantial unused credit lines from Japanese banks and the Japanese were astonished and relieved that they were not drawn down. I don’t have the exact amount, but it was unquestionably over $1 billion. There was no reason for the Fed to subsidize the JPM deal; Bear could have pulled down the credit lines pre closing. This would admittedly been senior credit rather than the junior funding that the Fed provided, but the point is there were ways to reduce the JPM commitment ex going to the central bank sugar daddy.

Similarly, Lehman was allowed to go into a disorderly collapse for poor reasons: namely, that it was politically unacceptable, after the Bear rescue, to bail out Lehman. But not bailing out does not mean “do nothing.” One tidbit from the Valukas report on Lehman (hat tip Economics of Contempt) is that Vice Chairman Don Kohn told Ben Bernanke in June 2008 that the view on the Street was that Lehman was as goner. If Kohn was hearing that, the New York Fed had to be hearing similar rumors.

Yet as Andrew Ross Sorkin’s Too Big to Fail makes clear, no one took the possibility of a Lehman bankruptcy serious. No one in the officialdom talked to a bankruptcy attorney.
This is a complete failure of planning. As a result, Lehman didn’t merely file for bankruptcy; it filed with a thin form, with no preparation of any kind. It collapsed in the most disruptive manner possible. And that was made even worse due to another, long-standing failure of oversight: the utter mess of Lehman’s derivatives book (how could anyone certify they had adequate financial controls?). So you had a legal train wreck compounded by an operational nightmare.

And it was the chaos unleashed by the Lehman failure that in turn led to the “No More Lehmans” policy, and the widespread view that extreme measures to prevent a big financial firm from failing were warranted. But this misses the fact that just as people can die violently or peacefully, so to do can company unwindings be more or less traumatic.

The biggest obstacle to Barry’s counterfactual is the fall 2008 timing. The sort of measure he described probably would have required a closure of trading markets (which September 11 showed did not bring the world to an end) and in a worst case, a full blown bank holiday. No one was willing to do anything that radical-looking; perversely, the course of least resistance was to tap the last reserve, the US taxpayer.

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  1. DownSouth

    I think we have to look no further than the unemployment rate to see what “a great job in the crisis” the authorities did.

  2. anonymous

    It most certainly isn’t becoming conventional wisdom among the fifty plus percent of the population who feel Obama and company are doing a poor job of managing the US economy. My guess is that just about everyone without a job is pretty unhappy with Treasury et al.

    I don’t know enough about finance to offer more than an opinion and my opinion is this: demand trailed off because of mounting fears over this gang’s ability to do the right thing and now many people no longer have money to spend.

    I retain a modest level of optimism simply because in a democracy people can overcome the boneheaded decisions of those in authority. Everything I’ve read indicates that the stimulus was too small and that the money went to two special interest groups that paid for special seats at the table: the banks and the public service unions. I don’t have the charts handy, but I have seen evidence that suggests that much of the money in the stimulus turned over to the states went to cover budget shortfalls instead of creating new jobs.

    Only the rich, the securely employed, and the delusional could even consider the notion that this gang did anything right.

    I stand by my earlier assertions that George Bush did a better job on the economy. I can’t think of a more damning assessment.

    1. DownSouth

      How you can draw a distinction between Bush and Obama is beyond me, and then to conclude that Bush was better than Obama is breathtaking in its absurdity.

      I suppose Obama can be accused of the additional sin of hypocrisy, since candidate Obama was touted as “change you can believe in,” whereas President Obama is little more than a Bush clone.

      As far as I’m concerned, it’s Tweedle Dee and Tweedle Dum.

      1. anonymous

        The difference is simple: six percent unemployed versus nine point five plus. You clearly don’t understand what going without a job for an extended period of time means.

        You need to lose the blinders, a far higher percentage of people are unemployed under this administration and the numbers look to only get worse for the entire time. And that’s with majorities in both the Senate and the House.

        Yet, even after the Lehman meltdown, these clowns were still promising not to raise taxes on anyone earning less than 250k. Health care? Cap and trade? Bailouts for big pharma and Wall st. And you get the wars.

        McCain for all his faults would have done a far better job of taking on the banksters. Virtually everyone I know without a job would trade unemployment under Obama (possibly permanent) for employment under Bush.

        1. sherparick

          As far as the unemployment rate under Bush, facts are stubborn things and it was 7.5% in January 2009 when Dubya left office and going up with a bullet.

          McCain’s first choice for Secretary of the Treasury was Phil Gramm. Enough said about how that would have worked out.

          If McCain had become President, or if the crisis had hit a year earlier under Bush, the stimulus response would have been even smaller and completely oriented to tax cuts for rich people and business, with even more f the resulting Government debt spilling into overseas investment and consumption (Keynsianism for China and Germany!!). I think Zandi’s estimate of where unemployment would have been without Obama’s and Summers half-hearted stimulus of 11.5 to 13%.

          Bush was an economic disaster. But Obama has continued, for the most part the Bush’s policies of the last two years of his administration; and for that matter those policies were a resumption under Paulson of the previous policies of the Rubinites that prevailed during the Clinton administration, e.g. frequent Government intervention on behalf of Financial firms and markets. The only difference is a somewhat more progressive tax policy and some rhetoric about holding business accountable for its misdeeds, which is enough these days to be considered “anti-business.” And compared with the active encouragement of looting that went on in the first six years of Bush-Cheney, I guess that is anti-business in that it slightly limits their ability to steal.

          I was thinking about Geithner and his comments on housing on the way to work in the back of my commuting van. It still appears to me he somehow hopes to bring the econony back with a second housing bubble (exports and a dollar devaluation are simply beyond a Rubinite’s mental vision of the possible.) Instead of viewing the prices of 2001-2006 as an aberration, he views the resulting crash as the aberration, since “U.S. housing prices always go up!” That house prices disconnected from their historical relationship to median income during the bubble period just does not seem to be accepted by him. But of course, he may not be able to emotionally process the fact of the stagnation (and now decline) in real median U.S. income over the last decade. The people in Tim’s particular social circle of bankers and hedge fund managers have seen their incomes sky rocket over the last decade. So Tim is still in denial about the the rather arithmetical facts regarding housing inventory, low demand, and falling median income that Calculated Risk presents that make another drop in housing prices pretty much certain.

          By the way, it is my view that even more than unemployment, it is the loss of equity value in their homes that makes most middle income people anxious and angry and looking for someone to blame and the Democrats toast come November. Even folks who own their homes with little or no debt have seen their net worth decline by 30 to 50 percent from what they thought it was five years ago. We middle income burghers really get pissed when property values go down. And the Republicans are showing us who to blame: Muslims building mosques in New York, Mexican illegals, and the “furner” in the White House. There agenda for correcting our problems is drug testing for the unemployed, further tax cuts for the superrich, cuts in middle class entitlements, and more general corporate looting of the public fisc under the slogans of “privatization,” “out sourcing,” and “deregulation.”

          1. anonymous

            9.5% over the entire first term, roughly, versus 6% on average. You’re right. The jingoism and xenophobia of the racist, Republican right (not all Republicans, or even most of them) is offensive. But it’s not as offensive as a 20% unemployment rate for African-Americans under a Dem president with majorities in the House and Senate.

            That’s the point. Nobody is disputing the shabby behavior of the Republicans. What I’m saying is that for the unemployed, the poor, and young people looking for jobs, this administration is worse than Bush or McCain.

            I’m not convinced the economy would have crashed and burned had a number of major banks been forced into receivership.

            You provide no evidence to suggest poor Americans suffered more under Bush. There might be plenty, but you aren’t providing it. My own anti-Bush credentials are, btw, impeccable. Again, that’s the point. 9.5 unemployment and 20% African-American unemployment would be regarded as damning proof of near criminal mis-management were Republicans in power.

            With Dems, we get shrugs and excuses. People want jobs and Dems can’t find a way to deliver. That’s not Bush’s fault. O claimed he was up to the job. He’s not, that much is clear.

          2. Chester Genghis

            Re: Anonymous

            Your logic is fallacious. You ignore cause and effect and rely entirely on coincident events.

            Politically speaking, Obama may have no excuse. But Bush’s policy of wholesale corporate looting & deficit spending left Obama with a very poor hand Day One.

            Obama’s stimulus package should have been bigger and should have been directed much more toward infrastructure spending. A second round of stimulus spending should be taking place now. It ain’t. It won’t. Why? The Deficit Peacocks demanding the opposite.

            Yes, the same actors who presided over deficit spending to finance two irresponsible wars in a time of relative –and I emphasize ‘relative’– prosperity, are the same ones who are now demanding deficit reduction during a recession.

            And these are the same folks you think provide superior management of the economy….?

      2. Bates

        “As far as I’m concerned, it’s Tweedle Dee and Tweedle Dum.”

        You are right. Those that continue to believe that the solutions to our many economic problems will be solved by a win by the ‘red’ team or a win by the ‘blue’ team are stuck in the past.

        HEY! The politicians are not your friends, the government is not your friend, the Fed is not your friend, Wall St is not your friend… The only friends you have are sitting next to you in this damn life boat and you are argueing with them about whether the Titanic would have sunk if the captain had been a red or blue advocate. Wake UP! You are being divided and conquered and you are helping!

  3. attempter

    several of the invitees said something along the lines of, “You guys did a great job in the crisis.”

    I wonder who those snivelling little kiss-asses were. It looks like the econoblogs are headed for the same co-optation as already destroyed the “progressive” blogosphere.

    When I read the Rithloz post it brought home how this “the bailout worked” (small “b” and past tense intended, as per their Big Lie) meme is being systematically propagated by the elites these days.

    The meme goes, “the bailout was necessary and it basically worked in preventing disaster”. We need to present a standard refuting and exposing this Big Lie.

    I wrote down this outline, though I haven’t yet written it up into a post.

    1. This heuristic holds up pretty well, I think:

    2. The Second Great Depression is setting in. The elites just want to obscure that fact with propaganda. Thus we have the normalization of 20%+ unemployment and the drumbeats of fiscal terrorism and “austerity” (Hoover/Mellon liquidationism).

    3. The kleptocratic structure must collapse. (A. Peak Oil, B. even without Peak Oil the whole thing’s a ponzi scheme – all sectors are mature, and financialization was nothing but building this ponzi scheme on top of a real economy insufficient to sustain the elites’ rent extractions.)

    4. A faster , non-linear collapse of the system would be better than dragging out the agony, which only enables the criminals to steal the rest of what little real wealth is left and entrench their power positions toward their goal of restoring medieval feudalism.

    5. But wanting to drag out the destruction of the finance sector, let alone wanting to maintain the finance sector in some form, bespeaks either a criminal intent or at best corporate liberal “reformism”, which is basically advocacy of “soft” tyranny.

    The “growth” ideology’s vision of prosperity is lost, was always a pipe dream, and even if it could have been true, it’s been subverted by tyranny.

    If we want to redeem the country and ourselves and capture the kind of humanistic prosperity we can still have going forward, breaking the finance tyranny is imperative. In 2008, reality (ironically, including reality as per the capitalist textbooks) tried to do some of the job for us.

    But instead we allowed the criminals to use the Bailout to temporarily prop themselves up, and to do it by accelerating their robbery of us.

    It’s mind-boggling that we allowed this to happen at all. And now are people going to believe the lies that say it was “for the best”? Now that’s the Stockholm Syndrome writ large.

    1. Bates


      I would like to add that ‘globalization’, supposedly ushering in an era of free trade that would be beneficial to all citizens everywhere, was the start of the US slide into labor, political, national, economic, and financial hell. Globalization is not new but was subdued for much of the 20th century until about 1975.

      Transnational corporations now act as giant enturprenurial enterprises, aided by leech like and compliant multinational banks, that discover willing buyers anywhere, shop for the cheapest labor and commodities, and deliver finished products to willing buyers anywhere. If a market slows in a given region or country, new buyers are sought elsewhere. If labor demands more income in one place, the sweat shops and robot factories are shipped to the next lowest labor bidder.

      Notice that nowhere in this giant global ‘free trade’ enterprise is there a place for national interests; ie, the US Constitution (or any country’s constitution) or the Bill of Rights. Many multinational corporations base themselves in the US for protection by a government that they control…if they moved their corporate base elsewhere they would be forced to buy another government…a dicey proposition as the corporate supporters of Hitler found out.

      The weakness of the multinational corporations is that although they claim that they will move if ornerous regulations or taxes are placed on them, they will not move. So a strong government that had the best interests of it’s citizens at heart could bring the corporations to heel.

      With globalization, once labor asks for increased wages to accompany increases in productivity, they are out of a job. Increases in profits due to productivity increases go to the top few people in the corporation…the workers have zero bargaining power. Displaced labor in US manufacturing, IT, and any other work that can be accomplished elsewhere for less are redundant or unemployed…and, not a cyclical unemployment but a structural unemployment…structural until those unemployed are willing to become the new low bidders.

      If our leaders do not understand that the current high rate of US unemployment is structural then they are idiots. I suppose one solution is for all citizens to be in the employ of the Gov… It has been tried elsewhere.

      1. attempter

        Exactly. Much of the alleged need for the Bailout and corporate welfare (including the corporate imperial war) is based on propping up this globalization regime which has wrought nothing but destruction for domestic economies and actual workers as opposed to the financial and corporate executive parasites.

  4. jake chase

    It should be obvious to anyone that Lehman was allowed to fail to justify the bailout of AIG, all for the benefit of Goldman. The entire charade was a Goldman operation, start to finish. Success was measured by the benefits derived by the looters. Unemployment and stagnation are simply collateral damage.

    The whole fiasco may be analogized to the war in Iraq. The purpose was to raise the price of oil by destroying Iraqi infrastructure, taking the second largest Mid East producer out of production for perhaps ten years. That purpose was accomplished in forty days. What has happened since is irrelevant.

    You cannot understand anything that happens without determining who benefits and working backward.

    1. Oliver South

      Good post, Jake. The dominoes were set in the proper order that Goldman Sachs needed them to tumble. The feigned surprise by Fuld, when everyone on the street knew Lehman was a goner months earlier, is kind of interesting.

  5. maynardGkeynes

    While I agree with everything Yves and Barry have said, I also agree with the commenter about the conventional wisdom — among voters probably and certainly among people who pay taxes, who have savings, and who have some skin in the game — this bailout is viewed very negatively.

  6. CingRed

    Seems to me (but I have no proof) the populace knew better than the experts when they were calling into their representatives telling them “Hell NO!” to the TARP bill.

    While it is impossible to really know if Barry’s proposed actions would have lead to a better outcome, I for one, have been completely committed since the days Lehman and Bear were going under to dealing with the fallout of that sort of route rather than the idiotic (IMHO) route that was taken.

    To claim that their solutions were the best is complete nonsense to anyone familiar with results testing, experimentation and DOE (Design of Experiment). The best that they can truthfully claim is that what they did got us to where we are. Nothing more, nothing less, and for them to claim more only exposes their lack of understanding and/or character.

  7. ep3

    I don’t agree it was a lack of political will that resulted in the many failures of policy. Just as you quote sorkin’s book, it seemed obvious to me that everyone knew for months that Lehman was going to blow up. So the rich people saw this as a huge power/money grab and told their pawns bernanke/paulson/geithner that doing what they did worked to the elites favor. If you look at it from that perspective, i.e. who were the winners- the bankers, then it looks like their plans worked perfectly.
    Yves you write to us like people don’t think 3 steps ahead. I mean that’s why these guys are in power. They can think ahead and plan out all the chess pieces. They knew blowing up Bear would cause the populace to oppose bailouts. Then they knew that by opposing bailouts, they could take down their enemies in Lehman. Then they could say “oh look at the mess of letting it blow up like you said. u better give us bunches of money to clean it up.”
    Again, you write from the side of an outside observer. How about writing as a member of the group that got raped, the taxpayer?

    1. JTFaraday

      Why? Have your taxes gone up? Mine haven’t.

      No, as of this moment, you’ll still have to look for the real rape victims somewhere else.

  8. Doc Holiday

    It is possible these people all have brain damage from drinking tainted Kool-aid, in addition to having sociopathic criminal tendencies, and the correlated issues with nepotism and incest … so in a way, these guys did a great job for being retarded crooks … now the real question is — how the F do we get rid of these mutations ASAP?????????

    Also see:

  9. Siggy

    I read the Blinder-Zandi piece and I’m somewhat understanding, but largely in disagreement with their view. I have met and argued with Zandi at his annual dinner. I know his work reasonably well and I deem him a better than fair economist.

    There was a time when he made a very dour forecast that was over long to arrive and in its arrival it was something very different from what he expected. I suspect that that experience with its attendant loss of clients left him reaching for the apparent safety of a consensus view. From my perspective, the consensus view largely has it wrong and relies on theories that do not comport with the economy at hand.

    I have listened to his presentations before various congressional committes and find his views to be very much on point but very careful as to not be inflamatory. I see this current joint effort as being propaganda that is intended to blunt more strident voices. The purpose of the paper is entirely political and belies whatever his private opinion might be.

    The Ritholtz piece is very compelling and does address a critical vulnerability of the Blinder-Zandi piece. The If Not What We Did, Then This, argument is clearly a smoke screen because, we shall never know what could have been. We can only conceive of what we might have preferred.

    Ritholtz’s challenge is quite correct and his alternative but not taken actions are, indeed, what probably should have transpired. The fact that the more reasoned course for adjudication thru bankruptcy and/or conservatorship, wherein creditors lost as heavily as equity holders, was not taken speaks to the protection of the banking/financial interests as opposed to the protection of the general electorate.

    Now what we might have preferred is no cost to the taxpayer. To get to that you have to allow institutions to fail. For us to have gone down that path we would have had to resurrect a somnolent regulatory structure that was deep in the thrall of abrogating responsibility.

    Thus, for me, the assertion that the ‘Authorities’ did a good job resonates as pure propaganda intended to raise a cheering crowd to the acceptance of yet another hairshirt. What we should be worrying about is just what are the ‘Authorities’ planing for the next act of this balance sheet and monetary fiasco.

    Is this not the greatest proof ever that a fiat currency does not work? Is it not self evident that fractional reserve banking is meaningless if the currency has no inherent value and is, with purpose, being debased each and every day?

  10. Lee

    Yves, I completely agree with you and Barry . But I’m not sure I understand “the biggest obstacle to Barry’s counterfactual is the fall 2008 timing. The sort of measure he described probably would have required a closure of trading markets (which September 11 showed did not bring the world to an end) and in a worst case, a full blown bank holiday. No one was willing to do anything that radical-looking; perversely, the course of least resistance was to tap the last reserve, the US taxpayer.”

    I’m glad you mention the example of the world not ending on September 11, but I do not know why any market shutdown or bank holiday would have been necessary. If the government nationalized the busted bankds on the spot with the statement “we will provide the necessary liquidity to maintain normal operations.” At that point if any counter party bank asked for immediate payment, the government could simply say yes or no. If no, the counter party banks might have failed but the government could just seize them too. This might have posed a problem for foreign owned banks but to insure liquidity, the fed could have coordinated its actions with the other central banks.

    Nothing galls me more than a company getting government money without a wipe out of the common stock.

    1. Yves Smith Post author

      WaMu, which John Hampton contends was solvent, suffered a run. That appears to be the proximate cause for its sale. I had readers and colleagues (savvy people) who pulled out a month’s worth of cash in Sept 2008, they were worried re a bank holiday. There WAS a run on money market funds post the Lehman collapse.

      The fear of collapse was live and real among the savvy. It would take little to spread it to the average person. There was a risk the authorities would have to do something more radical, like shut trading markets (did you forget how just about every big emergency move had to get done over a weekend, before Asian markets opened?).

      The Republicans still thought they had some odds of winning the Presidential election as of fall 2008. If they had had to close markets, I suspect they feared it would play straight into the hands of the Democrats.

      1. Glen

        The timing of the collapse has always seemed to be very “politically linked” most obviously by how it would sway the election, but less obviously the result of trying to pump up the economy under Bush (Greenspan holding the Fed rate so low for so long immediately come to mind) and then trying to hold off the impending downside.

        I also completely agree with you and Barry Ritholz. The crisis was very poorly handled, and is extremely unpopular with the public. The Obama administration’s continued self congratulatory backslapping on the bailout while unemployment goes up and the real economy slows is turning into the Obama’s very own Mission Accomplished.

  11. Dirk

    I think that TARP was needed, but the problem was we did not have anyone barganing for the U.S. taxpayer. Buffet got much better terms from GS than did the U.S. tax payer at virtually the same time. If Hank had been interested in negotiating on the side of taxpayers, then TARP would have indeed been a profitable opperation for the US. Bank shareholders would have been much more diluted.

    By way of saying the TARP was needed, I mean the eventual path of injecting equity into the balance sheets, not the absurd 3 pager that Paulson origionally presented where the gov’t would buy up all the crap papaer at grossly inflated prices. The idea of the gov’t being the investor of last resort for banks is not a bad one, we should ahve gotten a much bigger stake given the risk we as taxpayers were taking. We should ahve gotten at least twice the number of warrrents in the banks as we got, and an interest rate on the preferreds should have been closer to 10% than 5%.

  12. curlydan

    Maybe there has been little reaction to Ritholz’s post because it’s hard to tell if he’s right or not. It’s mainly supposition albeit good supposition to me. All we know is where the current policy landed us…right on 9.5% unemployment and trying not to head down the slippery slope again.

    Nonetheless, if Obama behaved like many CEOs taking over a new post, he could have cleaned house, taken the hit on the first year while blaming his predecessor, and then moved on. Instead, he chose to perpetuate the current program and maintain his “keep it cool” executive style.

    Maybe if the events of Sept 2008 had occurred in January 2009, he might have had the change to do something differently. Of course, if you agree with Marcy Kaptur in “Capitalism: A Love Story”, then you’d say the events of September 2008 occurred then to paralyze any change or reduce the amount pushback TPTB recieved.

  13. John Merryman

    In the long run, the banks have shot themselves in the foot. When the system separates from the populace, it’s the system that’s toast. Usually along with a fair portion of the populace, but that’s the way things work.

    It has been preached for decades that the wealthy create jobs and they shouldn’t be taxed. Now if someone is making lots of money and using it to invest back into their own business, this is true, but if they are investing on other businesses, it is those businesses which are growing the economy. The lender is the fuel tank and the borrower is the engine of economic growth.

    Capitalism and free markets are not synonymous. A market needs a medium of exchange and whomever controls that medium controls the market. Mayer Rothschild understood that. The issue going forward is whether we will continue to have a private banking system, or do we devise a form of public banking system. We understand various civil institutions, such as the police and the courts cannot be run as private, for profit enterprises. Eventually we will realize banking also falls in this category.

    The function of the central bank is to make maintaining the value of the currency a public responsibility, while leaving private banks to profit from managing it. Political power started as private enterprise, what would be called warlords today and eventually became gentrified as monarchy. When monarchs lost sight of the fact that their purpose was to guide their people, as opposed to simply exploiting them, they tended to be overthrown and eventually the whole system of hierarchal power was replaced by political power as a public trust. Democracy works by pushing power down to the level it is responsive. If we were to make banking a public function, it would also be bottom up. Local credit unions would use local deposits to loan to local enterprises and use the profits to fund local needs. They would then form regional banks for broader investments and regulating the currency.

    Three hundred years ago a debt based currency was a pretty smart idea, since there were few economic measures to determine the money supply and debt grows at roughly the same rate as productivity. The problem is that productivity must increase to pay off debt and debt must increase to finance productivity. Now the financial system has turned the entire economy into a debt production machine through lower quality debt and enormous gambling schemes promoted as “providing liquidity.” This creates the illusion of wealth far exceeding the productive capacity of the economy and often subverts actual production in the process.

    Since money is drawing rights to production, the question is how to formulate a viable and healthy production based currency system. Money serves as a store of value and a medium of exchange. As a store of value, it is private property, but as a medium of exchange, it is a public utility. As property, there is the desire to accumulate as much as possible, but as a medium of exchange, more money than productivity degrades the value of the money. Money should only be treated as a public utility. In that way, it would be similar to a road system. You own your car, house, business, etc. but not the roads connecting them and no one seriously cries socialism over that. Treating money as form of public commons would make people very careful what value they would take from social relations and environmental resources to convert into currency in the first place. This would be healthy for society, the environment and the monetary system. Of course, it would create a slower, but more sustainable economy. We all like having roads, but there is little inclination to pave more than we need. If we applied the same principle to money, life would be in better shape. Instead of valuing ourselves by how big our bank accounts are, our sense of worth would be on how strong our community is and how healthy our environment is. A smaller money supply would go a long way to limiting the size of the government and the banking system.

    With a debt based currency, there is an overwhelming need to create debt. A good example is government spending. The current system is designed to overspend by buying votes for enormous bills that can only be passed or vetoed. This serves to create debt in order to store capital, as government debt is the primary investment vehicle. In the spirit of actual budgeting, a possible solution would be to break the spending bills down to their constituent items and have every legislator assign a percentage value to each item and then re-assemble them in order of preference. The president would draw the line at what would be funded. This would divide responsibility, allowing the legislature to prioritize, while giving the president final authority over total spending. Since making the cut would be graded on a curve, there would be much less incentive to trade favors and the percentage system would allow legislators to fine tune their granting of favors to other legislators and lobbyists. Since this would likely reduce funding for local projects, a system of local public banks would fill this need.

    Another issue would be the variability of needs by different communities from their currencies, so possibly a system of various currencies could be developed, of different exchanges rates, inflationary expectations, etc. Then countries/banking collectives could join what most suits their needs and if necessary, switch from one to another, or start new ones. Obviously somewhat chaotic, but it would be an evolving system and would engender a deeper understanding of economics among the larger population, thus making them less vulnerable to financial predation.

    1. CingRed

      If you are equating dollars to money I would disagree with the notion that money is a store of value in a system that has been inflating (debauching the currency). Just run the numbers on your store of value when you have ZIRP and 2% inflation. You are forced to move your money into riskier investments just to stay even in the current environment.

      If the responsibility of the central bank is to maintain the value of the currency then once again our own Fed has failed at this too. Their stated policy is to not maintain the value of the currency by virtue of their targeted inflation rate and they have tried to mask the extent of their failure by their inane adjustments to the reported CPI. (By this they also steal from SS recipients via understated COLA adjustments.)

      1. John Merryman

        Further reason to educate people to the fact that money isn’t really a form of personal property. The banks and government would like everyone to think of it as a form of property, much as an angler would like fish to think of tied flies as a form of food. It theoretically makes every transaction recordable and taxable. It also allows a legal framework for particular individuals to own and control vast amounts of what is in actuality a form of public commons, since it is ultimately the taxpayers who are responsible for maintaining its value, as was recently emphasized with the TARP bailouts.
        Consider that in order to control inflation and maintain the value of this money, the Federal Reserve borrows surplus wealth, ie. sells bonds. So if there is a surplus of currency, by the Fed’s own logic, it is in the hands of those with a surplus of wealth. To be invested, money is essentially loaned to whomever can put it to productive use. Any system which naturally favors those sitting on assets, over those who can put them to use, is bound to fail.
        With enormous amounts of wealth being drained from an increasingly parched economy, for the benefit of those who have no use for it, other then to loan it back to those who need it, is it any wonder the economy is about to collapse?

        1. aet

          The industrious ought not to be required to support the idle.
          Whether they be the idle poor, or the idle rich.

  14. sgt_doom

    I just wish someone would bring up that SIGIR report recently published.

    About that unaccoutned for $8.7 billion?

    What were the connections between then-Fed Bank of NY chairman, Timothy Geithner, and JP Morgan Chase (bank with contract to coorindate the Iraq Trade Bank) and its managing director of that contract, Daniel Zelikow?

    Why so much embezzlement involved with the remaining audited hundreds of millions?

    What’s really going on?

  15. The Derivative Project

    The Derivative Project agrees completely with Barry Riholtz.

    Just announced…Goldman is suing a French bank for contract cancellation. Contract cancellation is exactly what should have happened for all AIG/Goldman counter parties!

    All the Fed had to do was to oversee it. The Derivative Project suggested it to the MN Senator – that this be looked at before voting on TARP and before funneling taxpayer funds to AIG for Goldman collateral calls. Why wasn’t this even considered..why didn’t the Minnesota Senator respond?…because of Geithner and Paulson’s conflict of interest with Goldman. No one would stand up to Paulson. It is time to reveal the underlying truth. Why did Obama bring on Summers and Geithner?

    The DOJ has never taken a stand on whether or not the AIG/Goldman credit default swap contracts were fraudulent. Of course they were. Take a look at the 1999 changes to the Commodity Exchange Act attempts to establish OTC derivatives’ “legal certainty.”

    “AIG ? There never was an implicit government guarantee that all counter-parties dealing with AIG-Financial Products — a giant leveraged structured finance hedge fund hiding under the skirt of the regulated insurer — would be made whole. But the Bush/Paulson/Bernanke bailout created one. Instead, AIG-FP should have been carved out for dissolution/wind down, while the insurer could have continued to exist on its own. AIG would have had the liability for the government’s costs, but the counter parties? They would have gotten zero. If you go to Vegas and shoot craps in the alley way behind the casino, don’t expect the gaming commission to collect your winnings. But that is what we did with AIG.”

  16. Dr. Pitchfork


    I LOVED BR’s 2008 counter-factual. As it happens, we featured it on The Daily Bail yesterday. We’ve also been hip to the “Great Job in a Crisis” / “Mission Accomplished” meme and are doing everything we can to undermine it.

    On Barry Ritholtz’s piece:

    On the Blinder-Zandi paper:

  17. Johnson

    The bailout was successfull and unsuccessfull in these areas:
    The successes:
    1.Saved the savings of the laboring classes. This is a area the neo-liberals always fail on. Both the 1873 and 1929 panics lead to toward dissavings inside the labors belts which attributed to the sharp declines in growth, which also lead toward a sharp decline in capital for startups and new business. This is a big area where Keynes scored a huge victory over the classical and neo-liberal schools. Schrumpter, Hayek and the ilk essentially got it backwords, which Hayek admitted in his later years.
    2.It stabilized the banks which arrested the downturn and stabilized the chunk of the plutocracy that earned massive profits from the boom.

    The failures:
    1.Lead toward lack of real reform to deal with the top heavy banking system
    2.Debaunched F/F which Bush/Paulson should be entirely blamed for.
    3.Didn’t make any progress solving restructuring the debt problems which are global. The debt just can’t be ignored, it must be eliminated which also goes toward number 1.

  18. Ishmael

    Great Job in a Crisis” / “Mission Accomplished — What a joke. First, we should have never been in this situation. Only a bunch of blind and deaf people would have allowed that to happen. Second, these people sit asleep at the switch after the Bear situation. Third, nothing has been solved. The can has been kicked down the road where it has grown into a gigantic monster.

    Bush was an idiot but Obama is one also. Both are puppets and no very little. Bush got by with help from his daddy and Obama just did nothing worth while in his life and besides knowing how to talk knows very little.

    The Swedish model should have been put in place and a cram down performed on all banks. Felony charges should have been filed against all bankers making over $250,000 a year and a promise to go easy if funds were clawed back. Now all of this will have to be repeated and correctly in the not to far future.

  19. RebelEconomist

    My heart agreed with Barry Ritholz, but anyone with a head should read the comments on his post from EoC. Legal complexities made it difficult to force institutions into insolvency without severe collateral damage. It would be interesting to learn from legal experts whether more could have been done at the time to overcome these difficulties – eg emergency legislation – and whether reforms have since been made – eg better bank resolution procedures – to ensure that they are not faced again.

    1. Dr. Pitchfork


      Anyhow, I assume you’re referring to the change in how derivatives are handled during BK that was included in the CFMA. This would be one of the key sites of contention. If I remember correctly, some people were advocating making changes that would NOT allow for derivatives to be cleared ahead of the claims of other creditors.

      There are complexities that BR doesn’t go into, but my point has always been that we ran roughshod over all kinds of legal complexities in the passage and implementation of TARP — with nary a squeak from anyone in authority.

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