Posted on 09/16/2009 7:41:45 AM PDT by 1rudeboy
The lesson is that institutions that take trading risks must be allowed to fail.
One year ago [yesterday] Lehman Brothers filed for bankruptcy. The weeks that followed are among the most dramatic in U.S. history. They led to a massive government intervention in the financial system—an intervention that will likely change that system forever.
Many people say that letting Lehman fail was the mistake that caused the financial crisis. To them, the lesson is that the government should never allow any "systemically important" financial institution to fail. If only Lehman had been bailed out, the story goes, we could have avoided much of a 45% drop in the S&P 500, a 4% drop in output, the rise in unemployment to 9.7% from 6.2%, and the $784 billion "stimulus" to top off a $1.59 trillion deficit.
This story is false.
The Lehman failure was not an isolated event. It was a movement in a dramatic crescendo of failures.
Two weeks prior, on Sept. 7, the government took over Fannie Mae and Freddie Mac, wiping out much of their shareholder equity. On Sept. 16, the government bailed out AIG, lending it $85 billion. On Sept. 25, Washington Mutual, the nation's sixth-largest bank, was seized by the FDIC. On Sept. 29, Wachovia, the nation's seventh-largest bank, was sold to avoid a similar fate. All this would have happened without Lehman. Meanwhile, the Federal Reserve and the Treasury Department went to Congress to ask for $700 billion for the Troubled Asset Relief Program (TARP).
Which of these events set off the financial and economic crisis by freezing lending to commercial banks? The nearby chart shows that the main risk indicators only took off after Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke's TARP speeches to Congress on Sept. 23 and 24....
(Excerpt) Read more at online.wsj.com ...
One of the better writeups I’ve seen (I haven’t read the Sowell book yet).
Exactly right and it still amazes me that so many otherwise astute Freepers drank the Paulsen/Bernanke kool-aid this time last year. Right to the last drop.
Bingo.
We went from far too much regulation to a world with insufficient regulation. And the problem, IMO, is not the size of the organizations, but the overleveraging of such.
The puritanical fools more worried about moral hazard than hazard cost the world about $5 trillion. Then they have the gall to demand upping the dosage. It's pure ideological crap.
As for the nonsense pretending that it will all be better if firms are made smaller so they can be allowed to fail, it is again simply nonsense. The reason tiny banks can be allowed to fail is they have no impact on the system if the large ones are kept alive. If you have the same size in a dozen banks, and they all fail at once because of the same credit losses and the same bad bets and the same market price movements, no, you don't get off any easier just because each individual firm is half the size. You still destroy the money supply overnight and go straight to hell.
Men ideologically opposed to the need for a lender of last resort are simply unwilling to face facts. The patent fact is that the whole notion that markets are so self adjusting and perfect that men can dispense with financial support for important banks in a smash, is false from start to finish, and it always has been. There has never been a smash, since the origins of financial capitalism, without such operations, and every time they were late or half-assed, ten year depression was the consequence.
Ideology does not cut it on this subject. Utopianism is deadly on this subject. Only men with practical responsibilities and line experience can be trusted to get even half of it straight. Lots of people not liking it doesn't matter. Reality does not comply with their mere wishes.
Ridiculous.
The idea that losses are avoidable is just crap, start to finish, it needs to be smashed. There is no conceivable policy that can avoid loss to some actors over the financial cycle. It would take a monotone increasing exponential of perfect smoothness to avoid them - and guess what? Anything that looks like that can and will be leveraged higher due precisely to its apparent safety, which will raise the growth rate and eliminate the smoothness.
Markets are not stable by nature, and the desire to make them so is a profound misunderstanding of their entire purpose. Signals to everyone on earth to stop what they are doing and adjust radically and do something else, cannot be sent or required or acted upon, without pain and difficulty for hundreds of millions of people. And without those things, you get no adaptation and no growth.
Economic security is a contradiction in terms. The only practical form of economic security is an income and accumulated wealth large enough to take the shocks without much caring. The shocks cannot be removed without removing the freedom that is their cause and the efficiency and growth that are their result.
When Lehman went down not with a stock wipeout but with epic loss to creditors, it started a run on money market funds that hit $1 trillion a day by that Friday. The money supply would have disappeared if the Fed hadn't stepped in to bid for money market paper.
When Lehman failed messy there were no prices for the better part of 2 days in numerous credit market instruments. The prices didn't fall, they vanished. No sales could be made.
When Lehman failed messy, the interest rates on bank debt in the secondary market hit 15 and 20%. I saw some at 40% with 6 months to run, on banks that survived the crisis.
No financial institution in the world earns that much on its assets, and none of them would exist were it sustained. "But such high rates would attract savers" - nope, not remotely. The savers gave their money to the US treasury on T-Bills at 0, oversubscribed 4 times, walking right by A rated debts at 15%.
Credit spread is what a financial intermediary is for. Take it away and there is no economic reason for them to exist. Take away the financial intermediaries and 95% of your money supply is gone.
The treasury then gets to pay all of it.
You can change the hat you are wearing when you pay it, and the longer you wait and the more half-assed you do it, the more you pay.
You can't save money by refusing to pay your bills. Grok already.
I didn't say it was.
I said your proposition was ridiculous. And it is.
I see FR's leading Wall Street pom-pom waver has shown up. Your worship of the cretins that created this mess is appalling. It's like putting bank robbers in charge of the FDIC because they know banking.
Look in the mirror for that, pom-pom boy.
It is the scale of the losses that matter. And that was a function of poor regulation and even worse risk management. That is the entire point of the conclusion of this article. And one that sails right over your Wall-Street worshipping head.
Every sound Austrian knows the only way to moderate the size of a crash is to moderate the size of the preceeding boom, and all of this "regulation will save us by slicing the bread thinner" crap is ignorant nonsense. If the timing of losses were random across all firms, having more firms might smear them out, but it isn't. If they were, the banks own insurance across specific loans by scale would work already. Instead all the risks are correlated because they are all driven by one central price.
Anybody who wants can sell as markets rise and buy back when they fall, and moderate every boom. But they don't on average, that is what makes booms in the first place. The cycle is a consequence of men's freedom to make mistakes in trading, and it cannot be abolished without abolishing said freedom - a game not worth the candle.
You keep missing the point, and probably on purpose. There was steady pressure by financial institutions to allowed increased leverage (the SEC, following the lead of European regulators, allowed the leverage ratio limit to double from 20-1 to 40-1, for example). If leverage levels had NOT been increased, there would not be anywhere near the level of backlash that we saw. Instead, the nitwits that you love to worship believed that institutional risk was a thing of the past and that markets would self-regulate. They were dead wrong ... as are you.
Limit leverage, and limit the downside. It ain't complicated ... unless you're a Wall Street type gunning for his bonus and not caring about the aftermath.
Throw in the remove of credit default swaps from regulation, and the use of credit default swaps to increase leverage as well, and your position has been thoroughly discredited. Not that much has changed, mind you - your Wall Street heros are still looking at nothing but the short term, because now, more than ever, they believe Uncle Sugar's gonna bail them out - and stick regular Joes with the bill for their risk bailouts after they pocket their bonuses.
Which means they - and you - are truly pathetic bloodsucking weasels.
Funny, they have done a grand job sucking money from the taxpayers. But they use lobbyists instead of guns, so I guess that makes it all OK.
All the rest of America are parasites on productive bankers, not the reverse.
Ah, so you are calling me a parasite, dipweed?
You REALLY want to go there?
Last I checked, I haven't needed government assistance to bail out my finances.
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