Sunday, November 30, 2008

The Financial Meltdown

I just got through reading this fascinating article about Ben Bernanke and the financial crisis in the latest New Yorker, here.

There's a lot I don't understand about the current financial crisis, but this article makes a few points pretty clear:

1) Allan Greenspan's policies deserves some of the blame for it and when Bernanke took over for Greenspan, he also basically continued those same policies. They kept interest rates too low for too long, and were not vigilant in their oversight of the housing bubble. They had some decent reasons for making these mistakes: it's difficult to differentiate and identify bubbles from legitimate growth, etc., but they could have done more.

2) The housing bubble is at the heart of the crisis (duh), but its excacerbated by how inter-connected financial insititutions have become. Much of this interconnectedness adds to the compexity, the opaqueness. The failure of Lehman Brothers, for example, appears to have been the domino that has exacerbated the problems we've seen.

3) Bernanke and Paulson have been sincere since their recognition of the crisis to do what is necessary to prevent a complete financial collapse, and while they've been the brunt of intense criticism, many substantive people have largely admitted that their actions have been necessary and commendable.

I loved this quote at the end of the article:

"Bernanke, in a search for inspiration and guidance, has been thinking about two Presidents: Franklin Delano Roosevelt and Abraham Lincoln. From the former he took the notion that what policymakers needed in a crisis was flexibility and resolve. After assuming office, in March, 1933, Roosevelt enacted bold measures aimed at reviving the moribund economy: a banking holiday, deposit insurance, expanded public works, a devaluation of the dollar, price controls, the imposition of production directives on many industries. Some of the measures worked; some may have delayed a rebound. But they gave the American people hope, because they were decisive actions.

Bernanke’s knowledge of Lincoln was more limited, but one morning the man who organizes the parking pool in the basement of the Fed’s headquarters had given him a copy of a statement Lincoln made in 1862, after he was criticized by Congress for military blunders during the Civil War: “If I were to try to read, much less answer, all the attacks made on me, this shop might as well be closed for any other business. I do the very best I know how—the very best I can; and I mean to keep doing so until the end. If the end brings me out all right, what is said against me won’t amount to anything. If the end brings me out wrong, ten angels swearing I was right will make no difference.”
Bernanke keeps the statement on his desk, so he can refer to it when necessary."

There's been a lot of talk among conservatives that blame FDR for actually lengthening the depression. While technically true, if FDR had continued hands off approach to the depression begun by Hoover, it would have been a much worse problem I believe.

Not that FDR was right on everything, but that he was acting decisively with sincerety and intelligence helped tremendously. I believe it buoyed the nation up and kept a recovery in play until WWII came and an investment in an overseas war finally got us out. (an over-simplification I'm sure - I just began a biography on FDR so I'm hoping to learn more).

The lessons of Lincoln are also helpful because like FDR Lincoln made his share of mistakes in the Civil War, but his and Grant's willingness to act with boldness and deciviness also were critical not only in winning the war, but also in winning the peace.

This isn't always a good thing, deciseveness, as we've seen with Bush Jr and the Iraq war. Also, such bold actions are only good in cases when the sky is actually falling (in the case of the Iraq war, it wasn't), and in many ways, the financial crisis "sky" really was falling, and hopefully won't. Finally, unlike Bush and Co., I know that Bernanke is brilliant but most importantly sincere.

Again, I'm having a hard time having a strong opinion about any of this, but my gut tells me, many if not all of these massive bailouts are exactly necessary and necessarily temporary.

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