One of the annoying and persistent Big Lies of the financial crisis is that the rescues were a really good thing because they saved the world as we know it. That argument is dubious for a host of reasons: the world as we know it is the very same one that went off a cliff, so we seem to be committing ourselves to the financial markets version of Groundhog Day; the choice was not between rescue and no rescue, but the type of rescue the officialdom implemented and other forms of intervention.
At Minyanville (hat tip reader Michael Thomas), former Reagan budget director David Stockman eviscerates a New York Times op-ed by Warren Buffett in which the Shill of Omaha contends that the seize-up of the commercial paper markets in September 2008 been allowed to persist, it would have represented a comet-wiping-out-the-dinosaurs level event as far as ordinary Americans were concerned. Key excerpts:
If Warren Buffett wants to tarnish his golden years emitting the gushing drivel that appears in today’s New York Times, he has undoubtedly earned the privilege. But even ex cathedra pronouncements by the Oracle of Omaha are not exempt from the test of factual accuracy. Specifically, his claim that “many of our largest industrial companies, dependent upon commercial paper financing that had disappeared, were weeks away from exhausting their cash resources” is unadulterated urban legend. Nothing remotely close to this ever happened….
Indeed, even a cursory review of the composition of the $2 trillion CP market as of September 2008 shows that the “blowup” was actually about losses on reckless bets by a few thousand money managers, not the availability of ready cash to millions of Main Street businesses.
In the first instance, well less than $400 billion of the total CP outstanding consisted of industrial corporation paper — that is, funding of the kind that might have been ordinarily used to cover payrolls and similar operating expenses. But let some enterprising graduate student investigate the limited universe of investment grade industrial companies then accessing the CP market. How many of these issuers lacked unused back-up revolving credit lines at the banks — for which they had been paying “standby” fees year in and year out for just such a contingency as the Lehman event seizure in the CP market? The answer is virtually none: The great industrial companies to which Buffett refers used CP because it was cheaper (even with 15 bps of standby revolver fees), not because they wished to put their enterprise in harms way every 45 days. Moreover, there is not a shred of evidence that any bank even threatened to default on contractual obligation to fund these back-up lines.
The next crucial fact is that the entire balance of commercial paper then outstanding — some $1.6 trillion — had nothing whatsoever to do with funding business payrolls or heat and light bills. Instead, it consisted entirely of the short-term liabilities of the shadow banking system — funding that permitted the financial arbitrage profits on which the whole system was based….
ecause the securitized ABS market has now shrunk to a shadow of its former self, it can be definitively said that nothing was flushed down an economic black hole in the fall of 2008 or at any time since. Not one auto loan has even been denied and not one credit card authorization request has even been disapproved because the CP-ABS market disappeared. Instead, such loans are now largely funded and retained on the balance sheets of the banking system originators — which, drowning in excess reserves anyway, haven’t broken a sweat. What has disappeared are the arbitrage profits that banks were raking off from foolish money fund managers who have finally seen that the “enhanced yield” they were obtaining from CP-ABS paper was not evidence of a better mousetrap — just their own cupidity.
You can read the piece in its entirety here.