Naked Capitalism: Ten Years After Lehman

By Marshall Auerback, a market analyst and commentator

I’ll readily admit this is a personal post.  One of the few, if not the only, good things to come out of the 2008 financial crisis was my introduction to “Naked Capitalism” and its proprietor, Yves Smith. In contrast to virtually all of the Pollyannish commentary out there (remember when Ben Bernanke estimated that losses from the sub-prime mortgage crisis in the United States would be around $100bn?), NC gave a much better read of the extent of the problems well before the MSM, as well as identifying and excoriating all sorts of perps, by name (like Robert Khuzami, who was the SEC’s head of enforcement under Obama, now making news as the prosecutor who nailed Michael Cohen). Naked Capitalism also documented multiple legal theories that were eminently well-suited to prosecuting TBTF executives.  The more I came to read her blog, the more impressed I came to be with the scope of breadth of the coverage of the mounting crisis, as well forming a friendship with a person, whose integrity and scholarship is second to none. So I hope you will give generously to Naked Capitalism; the Tip Jar tells you how.

It’s wrong to say that Naked Capitalism’s coverage ultimately made a difference, if one is to judge by the state of affairs today.  But history will treat Yves’s accounts much more kindly, especially when the next crisis comes, as it most assuredly will.

Why do I express unhappy confidence that a new crisis will soon be upon us?  Because if one is to read the voluminous commentaries that have emerged in the last few weeks, as the aftermath of Lehman’s demise has been recounted. Most disturbing has been the reticence of policy makers at the time, with the benefit of hindsight, to recognize that there was a better approach than simply restoring the status quo ante via bank bailouts which demanded nothing of private creditors, but punished private debtors – socialism for the rich, capitalism for the rest of us.

As George Soros and the President of the Institute for New Economic Thinking (INET), Rob Johnson have argued: “a critical opportunity was missed when the balance of the burden of adjustment was tilted heavily in favor of creditors relative to debtors in the response to the crisis and that this contributed to the prolonged stagnation that followed the crisis. The long-term social and political ramifications of this missed opportunity have been profound.”  Unlike the Savings & Loan crisis, there was no private sector loss recognition. Then Treasury Secretary Geithner falsely claimed that there were only 2 options:  bailouts or letting the system collapse.

That was a false choice.  As Soros & Johnson point out, much more effective and fair use of taxpayers’ money would have been to reduce the value of mortgages held by ordinary Americans to reflect the decline in home prices and to inject capital into the financial institutions that would become undercapitalized.  Yes, this might have exposed the full extent of the banks’ liabilities and might well have forced FDIC style restructurings, which ultimately would have resulted in changed management, and a break-up of Too Big To Fail Banks (and likely no “To Big to Jail” bank executives).  Tim Geithner, Hank Paulson, Ben Bernanke and Larry Summers to this day resist the idea that adopting FDIC style reforms, which would have provided a rational resolution to the foreclosure crisis (albeit, at a cost of destroying the capital base of the big Wall Street banks).  Summers dismissed these ideas as something akin to “socialism

Faced with the choice of preserving the financial industry as it was or embracing far-reaching reforms that would have served the interests of those who voted for him, Barack Obama, the “change you can believe in” President, chose the former.  Not only did that taint every government initiative undertaken in the aftermath of the bailouts (such as healthcare), but it created an undercurrent of cynicism, political disillusionment and anger that ultimately paved the way for Donald Trump. Of course, Trump’s cabinet of corrupt billionaires has done no better.  But even as #TheResistance has risen to protest the rise of his profoundly corrupt presidency, we should not pretend it is replacing something that was popular or effective. The old normal was not working. The nostalgia for the Obamas in the White House is not a yearning for Obama’s policies.

In today’s highly tribalised environment, it is hard to get many in the mainstream media to recognize this fundamental truth.  Criticism of any financial reforms undertaken by the Obama Administration is now seen as de facto endorsement of Trump or #MAGA. It’s nothing of the sort and Naked Capitalism is one of the few publications that has managed to maintain its moral bearings and speak truth to power, even when it is unpopular to do so. In this day of “fake news”, not only does NC remain worthy of your support, but essential to provide ongoing financial support so that Yves and her colleagues can continue their important mission.

There’s no question that articulating a view that diverges widely from a prevailing consensus can be painful. Heaven knows, as an ardent and vocal supporter of Modern Monetary Theory in the blogosphere, it was often personally painful, exhausting and dispiriting for me (and others, such as Randy Wray, Warren Mosler, Rob Parenteau, Scott Fullwiler, and many more) taking on anonymous trolls, who substituted debate for mendacity and vicious personal attacks of the worst kind. But it was always good to know that I had a supportive editor like Yves, who always had my back as well as the intellectual self-confidence (and, indeed, brilliance) to help me and others take on the onslaught.

Later she was joined by some great people like Matt Stoller, Dave Dayen, Lambert Strether, and others, all of them helped to make Naked Capitalism a intelligent platform which encouraged free but fair-minded debate, a venue where new ideas could be debated honestly and intelligently. And in many respects helped move the debate forward in a very positive direction. Yves Smith deserves a huge amount of credit for making NC that kind of venue and for that reason, she shall always have my loyalty, friendship, and support for this blog going forward. It’s been 10 years since we’ve collaborated together and become good friends as an additional bonus. Long may it continue! Please do your part to make sure it does. Share articles and what you learn here with people you know. And give generously to this fundraiser. Whatever you can contribute, $5, $50, or $5000, all helps keep Naked Capitalism an important voice for all of us.

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  1. ChiGal in Carolina

    Very well said, and to that I would add, wouldn’t it be wonderful if EVERYONE whose first stop like mine EVERY SINGLE DAY is NC could find it in their hearts to pony up just $20–the cost these days of a movie (with popcorn and drinks and including the gas to get there and back).

    Not to pressure those who really can’t (I get it, having been unemployed for two years since relocating and my current Ocare premium is $1300/month, an outrage; for those who don’t know, I relocated temporarily to care for my increasingly fragile 89yo mother)…

    but us regular readers get SO MUCH MORE value from NC day after day than from any movie, however good (my vote is for Sorry to Bother You) it just seems right.

    I don’t have $$ for a matching grant, but I would like to challenge all regular readers who have gone to a movie in the past year or think they will in the next to make a $20 donation if they haven’t already.

    And thanks to all of you for the wit and wisdom!

    1. Lambert Strether

      > I would like to challenge all regular readers who have gone to a movie in the past year or think they will in the next to make a $20 donation if they haven’t already.

      Or had ten large Dunkin Donuts coffees over the course of a year…

  2. P Fitzsimon

    I was reading in “Crashed” by Adam Tooze about the conference called by John McCain in September 2008. McCain halted his campaign for the presidency to address the financial crisis. He hardly spoke at the conference whereas Obama managed to put forth the right ideas aligned with the true “money bag” republicans and the Wall Street tycoons. At that point Obama and the Democrats became the party of the bailout. McCain was caught in a vice between the Tea Party anti-bailouts and big Republican donors who wanted a bailout, hence, he kept quiet.

  3. Dhruv Sharma

    Can anyone link the original article from NC dating from the crisis? I am a recent user.

    And of course, I will be contributing to the fundraiser. I shall not go to the movies this weekend. 20 bucks is all I can afford at the moment.

      1. Jeremy Grimm

        Your post from 2007 makes for a scary read in 2018, especially your introduction to the statement: “The bear credit market has begun.”

      2. Dhruv Sharma

        Its a pleasure to contribute to your website and the work that you are doing.

        And thats exactly what I was looking for. Thanks.

  4. Sound of the Suburbs

    Problem solving involves two steps.

    1) Understand the problem
    2) Find a solution

    Post 2008 – “It was a black swan”.

    We didn’t complete step 1, so our solution was a bit of a stab in the dark.

    Twelve people were officially recognised by Bezemer in 2009 as having seen 2008 coming, announcing it publicly beforehand and having good reasoning behind their predictions.

    What do they say?
    You can’t solve a debt problem with more debt.

    What have we been trying to do?
    Solve a debt problem with more debt.

    This is why you should complete step 1 first.

    What does it look like?

    We just need another Great Depression to clear down the debt.

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