Posts filed under “Really, really bad calls”
Here it is, one year later, and we continue to hear an enormous amount of misinformation about the Credit Crisis: What were the actual causes, what could have been done, what should have been done.
Lets consider the most widely held myths as the the cause of the crisis (skipping discredited nonsense).
Here is a quick overview of the key points many folks seem to be getting wrong:
• The Crisis was a confluence of rare events, a “Perfect Storm”: To the contrary, the crisis was inevitable. It was the end result of too much liquidity, bad central banking, special legislation, regulatory exemptions, too much risk, misaligned compensation systems, regulatory capture, and a unwavering belief that markets are efficient and humans are rational.
• Lehman should have been saved: This was not a yes/no decision. The best option would have been a more Bear Stearns approach (w/o the Fed $29B) — a prepackaged, orderly bankruptcy sale/liquidation.
• Regulation was the cause of the collapse: It was not regulation, but specific exemptions from regulation that allowed bankers to run wild. Glass Steagall repeal, CFMA, Net Cap exemptions, ignoring the lack of non-bank lending standards, excess stock option comp, all contributed to the collapse.
• Lehman’s collapse us what killed AIG: The same riptide that drowned Lehman also swept AIG out to sea: Too much leverage, too much exposure to subprime loans, too many derivatives, too little risk management, with costs borne by shareholders and taxpayers. A classic correlation/causation error.
• Housing’s special status caused the collapse: Housing has long had a special status in America. But the mortgage interest rate deduction has been around for a century. It did not cause the collapse — the abdication of lending standards is at the heart of this crisis.
That’s 5 of the big ones; there are obviously many more.
A greatly expanded version of this list is in Bailout Nation . . .
Tyler Cowen’s NYT column today, Where Politics Don’t Belong, comes perilously close to the mark in identifying the key problems of the bailouts: They encourage a reliance on special Government dispensation, regulatory exemptions and taxpayer handouts: “FOR years now, many businesses and individuals in the United States have been relying on the power of government,…Read More
This has to be the single dumbest thing I have read in months: Investment Bank Profits May Drop on Regulations, JPMorgan Says. (Note: I am referencing the analyst report, not the Bloomberg story) Here’s a news flash: With the least amount of regulatory oversight in generations in the 1990s and 2000s, bank profits were less…Read More
In keeping with our theme of beating the mainstream press by months and sometimes years — I always try to beat the Noble Laurelates by at least 6 months — I wanted to point to both the massive Krugman piece in the Sunday Times Magazine, as well as referencing similar themes we’ve hit upon over…Read More
This is from “News from 1930” website “There’s a large amount of money on sidelines waiting for investment opportunities; this should be felt in market when “cheerful sentiment is more firmly intrenched.” Economists point out that banks and insurance companies “never before had so much money lying idle.” -August 28:, 1930 The more things change…Read More
I try to follow the advice “Never pick a fight with people who buy ink by the barrel full,” but every now and again, I simply cannot help myself. Today is one such an instance. Like all human beings, I am wrong on a regular basis (my wife can read you chapter and verse). However,…Read More
Category: Really, really bad calls
Here’s another of those articles that look so embarrassing one year later: Can you imagine an article that insinuates that the government, not an independent academic commission, was the more objective arbiter of data? That argued we should let the pols decide when recessions start and end? Insane, right? Let’s go to our WTF were…Read More
Blast from the past: Turmoil in the housing market has led to fears that home prices will drop precipitously, particularly if foreclosures force large numbers of homes onto the market in the coming year. Recently, these fears have driven financial stocks down and led to the government rescue of Fannie Mae and Freddie Mac. But…Read More
One of the more fascinating things about a crisis and its resolution is the post-mortems: The after-the-fact analyses that some folks do to explain what occurred. These analyses are fascinating for what they reveal about the beliefs, methodologies, biases and cognitive failures of the many crisis watchers. Human fallibility being what it is, we can…Read More
I read articles like these with dread and horror: “As the White House begins to ponder whether to reappoint or replace Ben Bernanke when his term expires in January, the Federal Reserve chairman’s standing on Wall Street is on the rise while attacks on him from Congress mount. Treasury Secretary Timothy Geithner is expected to…Read More