It’s (Really) the Economy, Stupid

Jesse Eisinger notes that the politicos still don’t get the enormity of the Financial crisis yet: 

"There will be blood. In March, the markets got a reprieve, as hope rose that the crisis had passed. Unlikely. Over the next year, we will continue to see home-price depreciation. And much worse. We will have more failures similar to that of Bear Stearns. Since the banking system is pulling back, it will be much less willing to lend to consumers and, more significantly, to companies, which won’t have the money to invest in new plants and research and development. That means layoffs are just beginning. Personal bankruptcy is rising, and corporate bankruptcies are starting to go up. State and local governments will enter financial crises. The future holds massive pension shortfalls and retirement agonies. The problem is that the Fed has fired most of the bullets from its six-shooter, yet the enemy advances. The next president may well be dealing with markets in a continued free fall and a Fed that’s out of ammo and suffering serious damage to its reputation.

The landscape has been utterly transformed, yet the political establishment has barely grasped the enormity of the crisis. Washington isn’t solely to blame—all the supposed financial wizards on Wall Street missed it too. Treasury Secretary Hank Paulson has announced a regulatory overhaul, but it hardly addresses any of the sources of the problem. President Bush has given a handful of typically tone-deaf speeches about the economy. But the proposals from this administration have been characteristically slow, myopic, and nowhere near ambitious enough to address the problem."

Go read the full piece . . .

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Source:
It’s (Really) the Economy, Stupid
Jesse Eisinger
Portfolio Apr 14 2008
http://www.portfolio.com/views/columns/wall-street/2008/04/14/The-Next-Administrations-Economy

Category: Economy, Politics

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How Greenspan & Bernanke Invalidated Friedman

Hedge fund manager Scott Frew is a friend and occasional fishing partner. He had a few words to say about this morning’s discussion re: Volcker and Bernanke:

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I wanted to flesh out some of what Barry wrote earlier about former and current Fed Chairs Volcker and Bernanke. We must begin with Bernake’s now infamous Deflation speech. It is certainly “The Speech.”  And I think in many ways it’s a terrifying document.

I am, by the way, in total agreement that Greenspan’s the guy who’s responsible for all of this; the particularly insidious quality of bubbles is that once you’re in one, the future is more or less pre-ordained.

An ironic corollary of that thought is that it pretty much invalidates the entire, mainstream (most certainly including Bernanke and Greeenspan), Milton Friedman-inspired critique/view of the Great Depression as having resulted from bad monetary policy on the part of the Fed as the bubble burst. They needed, according to that critique, to be much looser than they were, and all the problems would have been avoided.

So, in a sense, Bernanke’s an acolyte of that same church (recall him saying to Friedman, at some dinner or something honoring him, Never again; i.e., as a result of the lessons learned, taught by Friedman, the central bank would never repeat those Depression errors,), can’t fall back himself on a “It’s Greenspan’s fault” defense, because that’s antithetical to their whole view of history.

I see The Speech itself as a terrifying document, although it’s also an
absolute blueprint for what’s going on today — you’ve got to give Ben
credit for foresight; he’s running down the checklist he provided there,
item by item, line by line. Too bad none of it’s working, at least to date, but
instead is exacerbating the problems.

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