By any measurement, the financial crisis of 2007-2009 deserves endless examination and inspection.
“Observe, my son, with what little wisdom the world is
— Baron von Oxenstiern
By any measurement, the financial crisis of 2007-2009, maybe still going on, has been the biggest finance story since Drexel/Milken and maybe since 1929. It deserves endless examination and inspection. Herewith, in a few “short stops and high hops,” as Phil Rizzuto used to call them, are a few issues that seem to me to bear substantial inquiry.
1.) It has been the policy of the government of the United States at least since the enactment of the Federal Reserve Act just before World War I to smooth out the business cycle, to keep credit flowing, to keep the economy humming and to keep employment high. This was further enunciated in many federal enactments including the Securities Act, the Securities Exchange Act, the Employment Act of 1946, Humphrey-Hawkins, and many stimulus plans of both parties.
That kind of imperative was relied upon by the Bush Administration and the Federal Reserve under Ben Bernanke to use extreme innovation and imagination to rescue Bear Stearns in early 2008. Seeing “systemic risk,” as the popular phrase goes, the Fed created a “special purpose vehicle” to buy bad debts and dicey assets of Bear and thus allow Bear to be a candidate for purchase and salvation.
Why, several months later, did the Fed and the administration decide that they could not use the same level of imagination and flexibility to save Lehman? It was clear to everyone that allowing Lehman to fail would be a disaster for the markets, for credit, for the entire nation’s economy. Not bad — a disaster.
Why, in that case, did the government adopt a “no more bailouts” policy about Lehman?
On the Brink, the new and fascinating book by Henry Paulson, Bush’s last Treasury Secretary and the man largely in charge of the financial situation in 2007-2008, says over and over again that he realized that letting Lehman go down would be extremely bad. He also says that the government was playing hardball and pretending it would not pitch in to help a private solution to the Lehman problem. But he never says when the pose became reality and/or why. (By the way, the title of my first novel, written with my father, was also On the Brink. From Simon and Schuster. Long out of print.)
Put another way, Mr. Paulson says that various persons counted that Lehman might have a capital hole of more than $10 billion, maybe much more, and that the government did not want to be responsible for plugging that hole.
But the losses to the economy following the failure of Lehman have been on the order of hundreds of billions, maybe trillions. Certainly the rescue and stimulus packages needed in the wake of the Lehman failure have amounted to the trillions.
Why didn’t the government put in the small amounts needed in Fall of 2008 rather than have to virtually bankrupt the state later to pick up the pieces after Lehman? If the U.S. went into severe recession, very foreseeable if Lehman failed, losses to the economy on a large scale were extremely foreseeable.
Or, let me try to put it another way: In his book, Mr. Paulson stresses that he had no authority to rescue Lehman. But if Mr. Paulson had simply had a press conference and said, “We will not let Lehman fail. We will take whatever measures are necessary to save it, including asking for an emergency measure from Congress and the same kind of energy from the Fed that it showed in the case of Bear,” Lehman would not have failed. Why didn’t Mr. Paulson do it?
And I know Mr. George W. Bush. He is not an ideologue and he listens and learns. If Mr. Paulson and Mr. Bernanke had gone to him and told him that there must be a bailout, he would have pushed for it and gotten it right away.
Or, I will put it yet another way.
I recently had the great pleasure of speaking to a man at a conference with extreme first hand knowledge of the rescue of AIG. He explained to me why the CDS creditors of AIG had to be paid in full by the taxpayers. His explanations had much to do with that old “systemic risk” again. But if systemic risk justified taking over $10 billion of taxpayer money and paying it to Goldman Sachs on highly questionable credit default swap (CDS) contracts, why didn’t that same systemic risk justify saving Lehman?
Why was there so much urgency about saving Bear, making us taxpayers pay off Goldman Sachs (I am a stockholder), and why so little about saving Lehman?
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