There were many factors that led us to the financial crisis of 2008—dangerous derivatives, irresponsible ratings agencies, negligent regulators—but one was more important than the rest. We now know it as the “too big to fail” problem. What brought the economy to the edge of disaster wasn’t only that financial institutions had made rash bets on lousy investments, but that those institutions were so massive that when their bets went bad, they threatened to take the rest of the economy down with them.
Not so long ago, all eight of the members of Congress being investigated by the Office of Congressional Ethics were black. Now, two powerful black members of the Congressional Black Caucus are on the griddle. There are two entirely appropriate responses. One of them is to wonder if there is something racial going on. Yes, that is reasonable. Dismissals of this line of reasoning as mere “crying racism” are, in this case, hasty. Bloggers blithely listing white people who have fallen into the OCE’s line of sight as disproof of the racism charge are missing the point.
The financial crisis in America isn't over. It's ongoing, it remains unresolved, and it stands in the way of full economic recovery. The cause, at the deepest level, was a breakdown in the rule of law. And it follows that the first step toward prosperity is to restore the rule of law in the financial sector. First, there was a stand-down of the financial police. The legal framework for this was laid with the repeal of Glass-Steagall in 1999 and the Commodities Futures Modernization Act of 2000.
Yes! Steve Weisman over at The Peterson Institute posted a nice riff yesterday about James Stewart's recent New Yorker piece reconstructing the week Lehman collapsed. His (and Stewart's) conclusion? Hank Paulson screwed up massively: My takeaway is that while Lehman executives were oblivious to the warning signs over the imminent failure of their storied investment firm, Treasury Secretary Henry Paulson may have increased the odds of a Lehman collapse by taking a hard line opposing a government role in its rescue.
Being Treasury secretary is usually not a job that calls for great political skills. But with a banking crisis crippling the economy and threatening to turn a recession into a depression, Tim Geithner has been plunged into the center of politics--as both the person responsible for what the administration should do, and as the main exponent of that policy. But he has faltered in crafting an effective policy and failed miserably in putting it forward.
As investors all around the world ran scared this past month, their panic was about the only thing easy to understand. The global financial system was collapsing and almost nobody could say--in plain English--what exactly was fueling such a gigantic crisis. Not the president, who offered insipid generalities; nor the presidential candidates, who stuck to old themes like earmarks, taxes, and deregulation.
Let's start with a basic assumption: The only thing worse in a market than disappointment is confusion. Investors can live with, and if they're smart profit from, bad news, as long as they understand it. But if things are confusing--say, a great, healthy company turns in horrible quarterly earnings, with no clear reason why--then investors get confused, and they panic. Over the last day, Treasury Secretary Henry Paulson offered up a helping of disappointment, topped by a dollop of confusion. First, the disappointment.
Right now Henry Paulson probably has, with Paul Bernanke, the most intellectually and emotionally fraught job in the world. So much has gone wrong and so much more can go wrong to the tune of trillions of dollars. Bernanke is a convert from the academy to public life, although he did serve on the board of education of Montgomery Township in New Jersey while he was a professor.
Earlier today, an economist I know pointed out this passage in Treasury Secretary Henry Paulson's proposal: The Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time. Note those words in bold. A fair reading of that passage, the economist suggested, is that the magical $700 billion figure we keep hearing is a limit not on total federal outlays, but only on the outlays at one time.
Clay Risen is managing editor of Democracy: A Journal of Ideas and a contributing editor at World Trade. His first book, A Nation on Fire: America in the Wake of the King Assassination will appear in January. It's tempting to watch today's Senate Banking Committee hearings, with Democrats and Republicans alike tearing into Federal Reserve Chair Ben Bernanke and Treasury Secretary Henry Paulson, and feel pangs of sorrow for the beleaguered duo.