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I Told You So

I told y'all back in early October that the TARP was promised to the financial public to stop an in-process computerized bank panic which would have destroyed the entire world's financial and political systems within a matter of days.

If they had not done that, their estimation was that by 2pm that afternoon, $5.5 trillion would have been drawn out of the money market system of the U.S., would have collapsed the entire economy of the U.S., and within 24 hours the world economy would have collapsed... It would have been the end of our economic system and our political system as we know it...
I think the danger of this has mostly passed, but without Paulson's promise it would all have been over but the shouting by the afternoon of September 18. And Congress's failure to immediately and unequivocally back up that promise remains one of the absolutely most insane things I have ever personally witnessed.

If the mood ever strikes you to buy Stanislav Petrov a drink, make sure you buy one for Henry Paulson too.

Comments (44)

Here, Hank take this cup of hemlock and drink up.

He never addressed the asset that served as the base for the debacle(1 trillion in sub-prime & Alt A mortgages - we're at 9 trillion spent in bailouts in a 14 trillion 2008 economy ), lagged in his response time by 12-15 months, sprung into action only when it was clear Goldman was headed for the bone-yard and was way too imperious and deceitful in his manner and dealings. Yes, TARP averted a complete meltdown and I supported it too, but let's be appropriately humble about the whole matter, since the worst may lie ahead - thanks in no small measure to Paulson's days at Goldman and Treasury. Hard to give much credit to one of the cataclysm's creators, and is this really the time for gloating? Geesh!

For all I know, Lieutenant Colonel Petrov spends his retirement in Siberia torturing kittens. There is no contradiction in buying him a drink for averting the apocolypse and reporting him to the SPCA.

Unless, of course, the money was being transferred to other banks or accounts. Do they say where the money was going? China? Under a mattress? Other U. S. banks?

I just read the transcript. $5.5 trillion is an odd estimate. Between 11am and 2pm are three hours. The transcript said that in the "first hour or two," $550 billion were withdrawn. So they're trying to say that just because $550 billion was withdrawn in 1-2 hours, another $5 trillion ($5,000 billion) would have been withdrawn in the next ~hour and a half?

Seems like an exaggeration, exactly the kind they needed to push an ill-conceived bailout bill through.

More importantly, you neglect the fact that the Fed's response of 1) closing the accounts, and 2) guaranteeing deposits up to $250,000 was entirely adequate to stop what bank run there was without a TARP bill, which speaks to the pointlessness of that bill.

Albert:

Unless, of course, the money was being transferred to other banks or accounts.
If you don't understand why that doesn't matter, then you still don't understand the nature of the problem.

The linked to post doesn't say that TARP (or the announcement of TARP) was what stopped the run on money markets. It says that guaranteeing accounts up to $250,000 was what stopped it.

Albert said:

More importantly, you neglect the fact that the Fed's response of 1) closing the accounts, and 2) guaranteeing deposits up to $250,000 was entirely adequate to stop what bank run there was without a TARP bill, which speaks to the pointlessness of that bill.

Zippy, I had this same reaction. Just based off Rep. Kanjorski's statement--which you give as evidence of your "told you so"--the TARP wasn't the primary factor. Yes or no?

Also, with all due respect, responding to Albert with nothing but "you just don't get it" is (as I'm sure you know) really unhelpful. Speaking personally, the more I hear this sort of thing from people whose expertise in the economic arena I value, the more I think we've got a system that needs to be torn down purely because of its inscrutibility.

I would add, though, that there is nothing inherently implausible about the Fed's $5.5 trillion dollar estimate. It's in the nature of a run that the number of people trying to get their money out of a given place grows exponentially as the run goes on. So what happened on the 18th was pretty scary, sure. But you don't stop a bank run on September 18th by passing a bill on October 1st (unless you have a time machine handy).

It is very difficult for the layman to believe the economy can be so fragile, especially those of us who have been reading "Yay, Capitalism!" essays for a decade. We've also seen so many Chicken Littles pass into obscurity after making ridiculous predictions.

So any real crisis will meet with natural skepticism.

Chris:

..."you just don't get it" is (as I'm sure you know) really unhelpful.
OK, but I believe I have explained this before. A bank run is a game where the first guy out gets his money, and the remaining guys still in get diddly. So all the corporations holding their cash in money markets would find themselves quite suddenly with no cash at all. Bye bye American economy, bye bye world economy shortly thereafter, and bye bye political systems within a matter of days. At that point even the guys who managed to get their cash out are done, because the "cash" they got out was predicated on a whole political and economic system which no longer exists.

BA:
There is some logical possibility that the bank panic would not have resumed had there been no TARP. But I don't believe it for a second. A $250K guarantee is exactly jack squat to the corporations which were the depositors that mattered in this event.

Zippy,

Given that the federal guarantee ended up extending to virtually all money market funds, I'd say that there's more than a "logical possibility" than the guarantee could have stopped the run.

Interesting rhetorical move, to label a $50 billion optional and limited backstop on tens of trillions in assets "virtually all".

Keep in mind that the money market consists of the high-grade, short-term debt instruments by which virtually every major business operates day to day. This is how companies make payroll, keep the lights on, etc. When that Primary Reserve Fund (the oldest money market fund around, if memory serves) failed, it signified a total collapse of the basic system of daily funding for private enterprise.

I do sympathize with the anger at how it came to this, and the annoyance at the inscrutability of the system, but this does not affect Zippy's central point, which is that September 2008 was no time to begin counseling experiments in radical anarchy.

There is some logical possibility that the bank panic would not have resumed had there been no TARP.

Who cares about TARP -- we should now devote our admiration and praise to its cousin:

Bail-Out
Assistance
Rescue
Fund


EXCERPT: Flash forward to Tuesday: Ms. Snowe provided one of three crucial GOP votes that helped Democrats pass $838 billion in new spending and "tax cuts" -- often for people who pay no taxes... The original economic theory behind this bill was to spend the money quickly to create jobs fast. But even the most talented spenders on Capitol Hill couldn't find enough projects to fund in such a rush. So they spread out the largesse over several years -- long after everyone hopes the recession is over. Some of these "timely" stimulus payments won't hit the economy until after the 2016 Olympics... Far more plausibly, Democrats will take the stimulus increases and make them part of a new, higher baseline for future spending growth. Anyone who proposes to cut from that amount will be denounced as "heartless" and Draconian...We recognize this bill is going to pass as early as today. But Americans need to understand the vast expansion of government they are getting -- and who voted to pass it.
SOURCE: http://online.wsj.com/article/SB123440436240475615.html

Zippy,

A little off the topic, but those of us non-economics folks are struggling to get our heads around just exactly WHAT is going on. I was an accountant in my past life, but have been a mom and grandmom now for long enough that I'm LOST when it comes to understanding this.

Is there somewhere that you could point me to read about all this stuff, in a slightly less technical voice than your really smart one? A place that I could at least START to understand what's going on so I could explain it to my kids/grandkids?

I'm not a complete idiot or anything, but I'm no economics guru either.

Thanks!

Ari:
The Porkulus is a whole 'nother ball of wax. What a joke. As I mentioned in another thread, it isn't even a Keynsian stimulus, and I'm temperamentally inclined to oppose Keynsian stimuli.

MamaT:
Jim Manzi seems to be level headed on the subject, but I really don't know of any "clearing house" for a popularized account of this stuff. I'm sure they will be written eventually, but in the meantime I expect the public discussion to become more obscure not less, as various political factions try to jockey for the kinds of outcomes they want. The media is just as bad: I don't know of a single non-financial in-person acquaintance who understood that the September 18 event was a computerized bank run before I told them personally. And that is still true many months after the fact.

I'm not an economist, at all, and my knowledge of economic theories (e.g. Keynsianism, the Austrian school, the Chicago school, etc) is pretty rough. In fact I have something of a personal disdain for the whole enterprise, since I think most people don't know what they are talking about, much like "climate change science". But I do have something of a clue about finance: about the nuts and bolts of how things actually work day to day in the trenches, as opposed to grand all-encompassing economic theories of everything. The two - economics and finance - are very distinct in my own understanding.

My own "for dummies" description of events would be something like this: for a whole variety of reasons, with plenty of blame to go around, the financial assets backing up the banks, which were themselves backed up by real estate, became very shaky. (I think this actually is ultimately the result of usury as Hilaire Belloc understood it; but that is a big side conversation).

Anyway, the economy - the companies actually making stuff and providing services - were actually doing quite well, and were generally being run very responsibly. I'm no fan of John McCain, as many know, but he was actually right to say that the core US economy was itself in good shape. Company balance sheets were strong, profits were good, productivity was good, etc. Things were leveling off a bit as a cyclical matter, and naturally there are always some companies and industries doing well while others faced headwinds, but generally speaking corporate America was in great shape to weather a minor downturn.

The problem is that all those corporations held their cash in places called banks. And the banks - the financial system specifically - was decidedly not healthy. The internal structure was such that as long as real estate continued to appreciate in value, the banks were fine. As soon as real estate stopped going up in value - just stopped going up, let alone started to drop - the banks were not fine. It was a heart attack waiting to happen.

Now because that heart attack was permitted to happen (the Lehman failure is arguably the event itself), lots of damage has been done to the economy. All those corporations which were in such great shape are now in much worse shape. But as long as the financial system continues to function, things will work themselves out over time - at least in the sense that the complete collapse of the economies and political systems of the world is no longer imminently likely.

What is going on now is mostly just a really bad economy. But there are still problems with the financial system - plaque in the arteries, if you will. The original TARP plan was just to buy up all the "plaque" and store it off somewhere (nowadays the news is calling the place where it would be stored a 'bad bank'): a simple plan, really, and a good one. That hasn't been done, which is part of why things continue to go sideways.

Anyway, I could ramble about this for a long time - but the short answer to your question is that no, I don't know of anywhere people can go to get good, clear explanations of what is actually going on with no axes to grind.

h/t Ezra Klein 2/11/09 from Mike Allen's Playbook:

An oft-quoted investment banker e-mails us: “There is no capital in the entire global financial system. None. When I say ‘financial,’ I mean banks, hedge funds, private equity funds, homeowners and other leveraged players. There is some capital among the ‘real money’ players such as sovereign wealth funds and central banks. And the U.S. can ‘print’ some. But that's it. … The problem with the distressed assets is not that there are no buyers. There are plenty of buyers; I speak to them every day. The problem is there are no sellers; that is, the banks won't sell. Because to sell is to book a loss on what you have sold and what remains. And to do that is to die. That's what it means to be insolvent.”

Zippy, the more you talk about this, the harder it gets for me to understand why you think that we should regret "the end of our economic system and our political system as we know it" - thoroughly corrupt & incompetent as that system turns out to be.

And, for someone who is so willling to bite the deontological bullet when it comes to things like the Hiroshima bombing, it strikes me as quite weird to see you taking what appears to be an aggressively consequentialist stance on the bank bailout.

Zippy: If you don't understand why that doesn't matter, then you still don't understand the nature of the problem.... A bank run is a game where the first guy out gets his money, and the remaining guys still in get diddly. So all the corporations holding their cash in money markets would find themselves quite suddenly with no cash at all.

I'll bite because I don't know how a bank run would actually happen when money is not physical but electronic. What you wrote would make sense if the funds were physical cash and not electronic. If Joe #1 takes the last piece of paper from the bank, then there's literally no more pieces of paper for the rest of the depositors.

But if money is just numbers in a computer (thanks to leaving the gold standard), which it is today and which was not the case in the Great Depression era, you can't have a bank run in the same way. In place of the limitations of real, physical funds, now you have legal accounting requirements for balance sheet ratios stored on a server. So what's stopping the balance sheet from simply becoming negative if Congress relaxed accounting rules? I seriously don't know. It seems that it could have, apart from regulations easily legislated away.

So I am in a position to learn here. If businesses electronically transfer trillions from Citibank, what would happen? It's not like Citibank could say "Sorry, we have no more cash." Would their software *refuse* to let the transactions happen? If it's merely up to accounting rules, I think it's implausible that Congress would say, in a *electronic bank run* situation, "Sorry, because you're insolvent, we won't let you process withdrawals from companies who have deposits with you."

It's not clear to me how an electronic bank run would actually prevent fund withdrawals in a world where money is essentially numbers on a computer. If under a fractional reserve banking system, you actually don't need a 1:1 reserve ratio, it seems odd to declare that 100:1 or even 100:-1 (in the event that a bank literally runs out of capital and companies still want withdrawals) is impossible. Certainly unsustainable, but since when were we concerned about that?

And unlike Blackadder, I still don't buy this $5 trillion in 90 minutes scenario. Who exactly was withdrawing the funds from the money-markets? Foreign entities? Car companies? My mother? Where was it going? That's a lot of money; if it was actually happening, it'd be pretty easy to figure out who the big players were, how big the transfers were, and where it was going. Was the money going from a Citibank money-market account to a Bank of America checking account? It actually does matter where the funds are going, doesn't it? So where was it going?

Also, I noticed that how much could have been withdrawn was not mentioned. Would the money markets have run out at $600 billion? $6 trillion? Somewhere in between?

Interesting rhetorical move, to label a $50 billion optional and limited backstop on tens of trillions in assets "virtually all".

Anyone who's interested is invited to follow the link and judge for themselves.

Zippy mentioned Stanislav Petrov at the end of his post. For me, the chief virtue exemplified by Col. Petrov was grace under pressure. The natural reaction, when you see American ICBMs coming at you, would be to panic. Petrov, though, managed to keep his cool, and thereby avoided disaster. This is, to put it mildly, not how I would describe Paulson's reaction.

Suppose that in response to the early warning alert, Petrov had started shooting people to prevent a counter-launch. No doubt today there would be plenty of people seeking to justify his actions, on the grounds that if he had done any less there would have been nuclear war. Such a claim would, of course, be impossible to disprove. Likewise, one will always be able to argue that, had Paulson not done everything just as he did we would have had the Great Depression times twenty. But I remain skeptical.

us non-economics folks are struggling to get our heads around just exactly WHAT is going on...Is there somewhere that you could point me to read about all this stuff, in a slightly less technical voice than your really smart one?

Don't let that bane of modern life, the "specialist" intimidate you. After all it was hubristic wizards that took us over the cliff.

Here is a good summary; http://www.ft.com/cms/s/0/9ebea1b8-f794-11dd-81f7-000077b07658.html

And since Roubini has been calling this meltdown since 2006 he's earned credibility. Brace yourself;
http://www.cnbc.com/id/15840232?video=1027496846&play=1

The only recourse is to plan as best we can for the worst, pray for the best and place all our hope in the only One who matters. All that is truly valuable is still very safe.

Brilliant economists opposed TARP and said what Bernanke and Paulson desired was undesireable. I doubt they were revolutionaries agitating for the end times.

It was only a few months before this putative meltdown that Bernanke and Paulson were chirping songs about our economic stability.

Either nobody knows what the heck is going on or we were conned by the very folks who created this mayhem in the first place.

I echo Max Schmelling's Manager, We wuz robbed

Blackadder:

The guarantees are offered via the government's $50 billion Exchange Stabilization Fund, extending protection similar to FDIC insurance for bank savings deposits.

How would Treasury have paid out these guarantees if people kept on withdrawing from the money market accounts? All they put up was $50 billion, as Zippy said.

Steve:

I don't think there is an obvious natural law principle at stake here. A government can never justifiably intervene to rescue a banking sector? No, that can't be right. The state and the banks have been intertwined for decades, if not centuries.

should [we] regret "the end of our economic system and our political system as we know it"

Yes, I think we should. It had a hell of a run, and there's no good reason to let a panic bring it down in a flash.

Look, much of what is happening now is healthy. We need to deleverage, across the board. We need to save more. We need to reject the false idol Bigness. We need to discover the vulnerabilities that globalization exposed us to. We need to get back to the simple business of making stuff, and be disabused of this notion that the "service economy" (read: financial engineering and the whole enormous edifice of advice and commentary) can replace the basics of production. But all this is painful, and will be for many years.

We got our hats handed to us in this one, but it does not mean that we should throw up our arms and junk the whole system.

I doubt they were revolutionaries agitating for the end times.

Don't bet on it.

Either nobody knows what the heck is going on or we were conned by the very folks who created this mayhem in the first place.

Probably some of both. The main thing to consider is the size of the losses incurred. The global market for derivative contracts has a notional value of $600 trillion. Even assuming just a 10% decline in value you are looking at astronomical amounts of wealth that were simply destroyed.

Steve:

Zippy, the more you talk about this, the harder it gets for me to understand why you think that we should regret "the end of our economic system and our political system as we know it" - thoroughly corrupt & incompetent as that system turns out to be.
Mainly it is all the running, screaming, suffering, and dying that we would (not should, but in fact would) regret. Mind you, I'm not against getting rid of this system for something better. What I am against is getting rid of this system instantly in a matter of days and replacing it with nothing, that is, with undistilled anarchy/tyranny. My argument all along has been that the TARP and its concomitants were the most conservative thing it was possible to do in the face of the reality we actually faced.
And, for someone who is so willling to bite the deontological bullet when it comes to things like the Hiroshima bombing, it strikes me as quite weird to see you taking what appears to be an aggressively consequentialist stance on the bank bailout.
As Paul said, there isn't anything intrinsically wrong in the government buying assets (whether mortgage-backed securities or preferred stock). So in this kind of case, consequences determine the right course of action.

Albert:
I have it on what I don't pretend to be other than hearsay, but reasonable hearsay, that there were about $2.2. trillion in actual sell orders already teed up when they shut down the markets. Lets just say that you are betting a great deal on what looks to me like an intransigent insistence that a bank run is simply impossible on some kind of metaphysical grounds.

We need to deleverage, across the board. We need to save more. We need to reject the false idol Bigness. We need to discover the vulnerabilities that globalization exposed us to. We need to get back to the simple business of making stuff, and be disabused of this notion that the "service economy" (read: financial engineering and the whole enormous edifice of advice and commentary) can replace the basics of production. But all this is painful, and will be for many years.

Paul,
Sounds like the basis for a very intriguing and beneficial speculation on post-crash American. What will she look like? What is worth conserving and what aspects of our current living arrangements deserve jettisoning? The TARP debate has moss all over it and we argue whether this is a crisis of illiquidity or insolvency, or whether deflation or hyper-inflation poses the biggest threats to our social infrastructure, but you hint at something more of us would like to see developed. Hope you take the time to finish what you started above.

have it on what I don't pretend to be other than hearsay, but reasonable hearsay

Umnnnhhhh, yah.

Your failure to document the allegations was the cause of my objection to your statement in the first damn place.

And:

You continue to allege that 'the run' could not have been stopped without TARP.

Not necessarily. The Fed opened its gates in October, and "non-borrowed reserves" went upside-down for the first time in at least 50 years--but that means that the Fed backstopped the loss WITHOUT TARP.

Zippy: I have it on what I don't pretend to be other than hearsay, but reasonable hearsay, that there were about $2.2. trillion in actual sell orders already teed up when they shut down the markets. Lets just say that you are betting a great deal on what looks to me like an intransigent insistence that a bank run is simply impossible on some kind of metaphysical grounds.

I appreciate the information concerning the amount of sell orders; I think I was asking a different question, namely, what amount would have constituted the point where there's "no more left" and further withdrawing entities would be left holding an empty bag. This is, I think, a different question. Would the banks have "run out" at $600 billion or $6 trillion or $10 trillion, and how do you know? If $10 trillion, for example, then a $5.5 trillion withdrawal wouldn't be a big deal. This seems to be a sort of critical point.

And it relates to the second part in this way, which I don't really think is metaphysical, as you say. When a bank has a finite amount of physical cash and runs out of cash to give withdrawing parties, that's easily understandable. But our banks don't operate on physical currency anymore; they operate on electronic numbers which represent currency. When I transfer $10,000 from a Bank of America money-market account to an ING Direct savings account, BoA doesn't move a hundred $100 bills into some ING Direct vault. They simply change numbers on a computer. This seems an obvious point, but numbers on a computer can be negative. So a bank run can't happen in the same way...

What keeps financial institutions from simply allowing negative numbers to stay on their balance sheets is not the limits of physical currency, but mere regulations which can be changed similar to mark-to-market rules. But it's only on the basis of these regulations that a "bank run" can even occur; so if the regulations change....

So this is not a mere "metaphysical" point at all. It is a critical fact about how money is "stored" which called into question how a bank run could even occur in a world of electronic money.

dad29, lose the attitude, please.

Paul, Zippy - if only I could see some sign that we were, in fact, "getting rid of this system for something better," I might feel reassured. But I can see no such sign.

Albert:

I suppose the answer to your question is that I don't know if bank runs are a fundamentally different animal, a mere chimera, in a world of fiat currency as opposed to a world of commodity-backed currency. But I'm pretty sure counterparties would not accept payment in the form of negative cash, whatever is meant by "cash", even if Congress suddenly waived all reserve requirements for private institutions in the face of insolvency, thereby allowing negative cash balances, whatever that might mean. I'll also point out that the latter would be far, far more radical than the TARP, since (I think) in effect it would be authorizing all manner of private institutions to print money; a power which at present is limited to the federal government. It would also be direct and formal assertion on the part of the government that money is quite literally meaningless. Those are all much more radical steps than just buying up financial assets (whether distressed debt-based derivatives or preferred stock) using real cash, to the extent that fiat currency is real cash.

I'm not a big fan of commodity-backed currencies, which in my understanding are no more real, other than as naive perception, than fiat currency.

But that is all a very different discussion from the question of what conservative, prudent, sensible action (or inaction) was available to us in the face of concrete particular reality of the actual bank panic on September 18. My sense is that something as radical as just throwing up our (that is, the US government's) hands and explicitly saying "well, fiat money is meaningless anyway" and doing nothing would have resulted in the precipitous end of our global economic and political systems, with all that that implies.

It would also be direct and formal assertion on the part of the government that money is quite literally meaningless.

An interesting point.

Kevin Jones:
Interesting article. I get the impression that he is confusing some kind of net amount with transaction amounts, which goes right to Albert's other question. We know that the panic was institutionally driven -- everyman, including myself, was just sitting on the sidelines and the massive redemptions were coming from institutional clients, who in typical fashion were well ahead of retail investors on current events. That is, there was no "retail" panic. Treasury-backed paper spiked massively, so that may help answer Albert's question of what mattress the redemptions were going into, though those are separate transactions. "Treasuries are the new cash" and all that. But there are enough interesting questions here that I'm going to try - no telling if it will be successful, or if they'll even know - to get more details from a few folks who might know.

Some questions of Albert's are not answerable though, because financial transactions are generally private. (There are exceptions: affiliates in public companies are required to disclose stock sales, for example. But generally speaking financial transactions are legally private, as far as I know, and we can't know the who's and the where's and the what's without a court order).

Albert, I did not title the post "I Told You So." Attitude runs both ways, no?

From Kevin's link:

Kanjorski is clearly fishing here: he's talking about anonymous newspaper reports and vague "conversations" and anonymous Wall Street "friends", and basically asking Paulson to confirm his suspicions. Which, naturally, Paulson doesn't do, because the suspicions weren't actually true. That said, however, Paulson's being-polite-to-the-Congressman answer doesn't explicitly say that Kanjorski's numbers are false.

Oh, yah. That's solid stuff.

The fact that Limbaugh got caught up in this does not make it any more credible--and taking the testimony of a Congresscritter as some sort of holy writ is....umnnnnhhh....not wise.

See, I have friends in the money markets, too; they are large Midwestern players. And when I asked THEM about Zippy's concerns, they all responded exactly the same way: 'Nope. There are concerns, but no Big Panic.'

Yes, Reserve broke the buck and there was outflow. But "running out of $100.00 bills" is a sign that the Colombian cartel was in town for a day--NOT of financial Armageddon.

My friends can beat up your friends.

Good grief.

Conspiracy theories are like popcorn, Zip. Can't have just a little...

I'd love to believe it ain't true; but Elvis is dead. It has been reported publicly in several places, and now by a Congressman who was actually at one of the meetings. It is no more a conspiracy theory than "the Bush administration had prisoners tortured" was a conspiracy theory, and expecting the Secretary of the Treasury of the United States to confirm it in public hearings with detailed names and numbers is a very, very silly expectation.

In any case, you've made the point "I don't believe it happened" over and over and over and over again. In fact, "hear no evil" is the only thing you've ever said to me in all these months. If it didn't happen, then yes, we've been scammed, I'm all wet, and 911 was a scam to justify neocon ambitions - oops, I mean the panic was a scam to justify a big robbery of the US taxpayer. Say something new and interesting, or say nothing at all.

Hopefully all can agree on this;
"Our unsustainable debt-fuelled boom, in other words, produced both the conditions for a major global financial disaster, and a political strengthening of the people who benefited most from the risk-taking and associated compensation packages that made this disaster possible. Ending the financial crisis is relatively straightforward - a forced recapitalization and change of ownership/management in the banking system - although this will not immediately lead to an economic recovery (more on that here). But seen in deeper political terms, decisive action to restructure large banks is almost impossible. Such action would require overcoming perhaps the single strongest interest group in the United States today.

How can you do it? The answer must be by splitting this powerful interest group into competing factions, and taking them on one by one."
http://baselinescenario.com/2009/02/08/high-noon-geithner-v-the-american-oligarchs/

Zippy, well, I agree that in a sense, commodity-backed currency is no more _real_ than fiat currency. Any currency is merely an abstract placeholder of value and in that sense has no "reality" on its own. And yet, the reason commodity-backed currency is superior to fiat currency is not because commodity-backed currency is _real_ in that sense, but because it necessities stabilizing limits on the amount of currency in circulation. It's a form of fiscal self-discipline in that sense. Commodity-backed currency means we refuse to take the easy way out of printing more money to solve our problems, instead taking responsibility for our actions by accepting the painful consequences.

How does this discussion concretely relate to the bank panic? In your terms--well, sort of--the public admission not that "well, fiat money is meaningless anyway" but that "well, fiat money represents a lack of fiscal discipline that has led to this crisis" would be the first step in recovery. In cliched words, admitting the problem is the first step to finding a solution.

I realize you believe that the midst of a crisis is not the best time to make radical changes at great cost, but unfortunately it seems obvious that crisis periods are the only times the need for such changes are clearly seen and the prospect for change is realistic. Continuing to TARP over the holes until a more _opportune_ time to make changes sounds nice in theory, but will never happen the way we want.

As the Austrian economists well understand, all we're doing now is delaying and magnifying the inevitable reality to come. Less suffering now is better than more suffering of actually innocent people later. That remains my position on the reasonableness of stopping the bailouts.

Lydia, have you seen this video?

As the Austrian economists well understand, all we're doing now is delaying and magnifying the inevitable reality to come.
And again, I put as much stock in airy-fairy economic theories about what the future will bring decades from now as pretext for permitting the world to melt down right now, with clear, concrete, devastating consequences right now - less stock actually, since the consequences are clearer and more dire - as I do in global warming, excuse me climate change, as pretext for imposing draconian economic policies which bring economic ruin. Hell is going to be paved with the skulls of economists intermixed with the skulls of bishops. I know with great confidence what the immediate consequences can be from letting a computerized bank panic run unchecked. Anyone who claims to know that "future generations will suffer" if we don't permit a bank panic to run unchecked tells me, in that assertion, that he doesn't know what he is talking about (no matter how sincerely he believes that he knows what he is talking about).

What is so airy-fairy about future insolvency or hyperinflation due to unsustainable borrowing? You not only overstate the concreteness and clarity of the supposed consequences of not bailing out banks now, in spite of 1) not even knowing how much money would even constitute a bank run in our electronic, fiat money world, 2) the concrete evidence that simply closing accounts for the day and guaranteeing $250k in deposits stopped the supposed bank run, and 3) the implausibility of the claim from a clueless Congressman that the entire world economy would have collapsed in only 24 hours, but you ignore the very real price of debt as if it doesn't have to be paid back. I realize that "trillions of dollars of debt" seems abstract compared to suffering of people now, but it isn't.

There is a point where it is simply unsustainable (not to mention immoral) to pay $10 million of someone else's money to save a life. And that is what you are suggesting here, simply on a massive and therefore "abstract"-feeling scale.

Anyone who claims to know that "future generations will suffer" if we don't permit a bank panic to run unchecked tells me, in that assertion, that he doesn't know what he is talking about (no matter how sincerely he believes that he knows what he is talking about).

Well then, perhaps after you glibly imply I don't know what I'm talking about, you should reflect on things like "compounding interest on debt," "forcing future generations to pay for our mistakes," "larger and larger economic bubbles bursting," "the liberals are on your side here," "moral hazard," the idea behind having surgery to prevent worse pain and suffering later, "I really shouldn't have such great confidence in my knowledge of what exactly would happen if a computerized bank run that has never happened before in this scale and in this economic climate," and "Maybe the Austrian economists who, unlike me, correctly predict cyclical boom/bust periods, including this one, shouldn't be dismissed so readily."

Lastly, the reason we reject anthropogenic global warming is not because policies to address it are economically painful to us now and are primarily for future generations. We reject it because the evidence is inadequate and predictions consistently fail to materialize. Kind of like our current fiscal policies that are changed on a whim and which curiously benefit from vague predictions, lack of concrete evidence, and a whole lot of Doomsday! talk. On the other hand, we have the correct predictions of economists who believe a sharp economic contraction and failure of banks now will be beneficial in the long run, except for politicians who require re-election in the short-term and are ideologically inclined to massive government intervention.

What is so airy-fairy about future insolvency or hyperinflation due to unsustainable borrowing?
Lets be specific here. The prediction is that allowing the bank run to run its course would cause less harm, in the long run as measured in decades, than stopping the bank run by promising and following through on TARP I.

No one can possibly make that prediction; and its believability is the inverse of the confidence with which it is pronounced. On the other hand, in stark contrast, we know that the consequences here and now of simply permitting a bank run to decimate the financial system are dire.

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