(this was published previously in the Macon Telegraph)

Being in the middle of a record economic crisis presents a rare learning opportunity.  Several books are worthwhile for those seeking to understand what just happened.

Too Big to Fail by Andrew Ross Sorkin details the action of the Fed under Benanke and Treasury under Paulson during the crisis period between August and December.  While Geitner as head of the New York Fed was also featured the central player of this crisis was Hank Paulson.

Monumental decisions involving billions of dollars of assets were made in days, sometimes hours.  Both Paulson and Geitner had a sense that the market was due for a correction long before the crisis hit, but they probably did not see it coming as fast and as broad as it did. Bernanke noted that just as there are no atheists in foxholes there are no ideologues in economic crisis either. Neither Republicans or Democrats wanted to bail out Wall Street , but the crisis dictated actions that were against the grain of capitalists of both parties.

Paulson worked tirelessly to find appropriate merger partners for weak players like Merrill Lynch, Wachovia, and Lehman.  He almost had Barclays ready to buy Lehman when the British Financial Services Authority ( FSA) refused to approve the acquisition/merger because of the risk it brought to the British financial system.

Lehman was singular in the fact that it was not acquired or bailed out and thus had to go bankrupt.  Part of this was timing; Congress was just in no mood to bail out a Wall Street player.  Part of the reason was George Bush’s cousin who worked for Lehman and his brother Jeb’s association with the firm. Such close political relations probably worked against the interests of the firm.

In retrospect bailing our Lehman’s may have forestalled the panic that engulfed the rest of the system. With Bear Sterns gone and now Lehman’s gone, depositors wondered who was next and there began a run of the other banks like J.P Morgan and Morgan Stanley.

While Paulson’s association with Goldman was suspect the fact was he had to severe his tie and sell his stock ($485 million worth) in order to take his job at Treasury. Since his actions were so scrutinized he was careful to avoid even conversations that would indicate favoritism toward his old firm.

The most difficult decision was to bail out AIG whose credit default swaps acted as insurance against many of the cdo’s (collateralized debt obligations) that infected the financial markets. As the underlying assets plummeted in value AIG was downgraded and had to put up more capital that it could not provide.

Having to make such massive changes and decision in such short time meant that perfection was not obtainable. Barney Frank justifiably wanted some assurance that compensation to the executives would suffer from their misdeeds, but there simply was not enough time to rule of thousands of contracts during the time period that decisions had to be made.

Wall Street clearly engaged in risks it did not understand, but neither did the regulators such as Greenspan and his successor Bernanke. Complicated risk models gave the CEO’s delusional certainty, but eventually the party came crashing down for the same reason all bubbles burst;  lack of trust and confidence.

But Sorkin spends little space getting into the detail of the causes of the crash and suitably stays focused on the urgency and the actions required in response. 

For more information on the background that caused the crisis I recommend The Housing Boom and Bust by Thomas Sowell,  Financial Fiasco by Johan Norberg, most of all After the Fall: saving Capitalism from Wall Street - and Washington by Nicole Gelinas.

Sowell and Norberg focus more on the misguided Government fiscal and monetary policies that inflated the housing bubble, but Nicole Gelinas also analyzes which good regulations were unfortunately removed (and by who) and which bad ones were inappropriately applied.

A crisis of this nature required the perfect storm of many great errors to all focus their retribution at the same time. Unfortunately the media large engages in partisanship and demonization and few people will take the time to understand what happened and why.  It is complicated but engaging the problem reveals basic principles of sound policy that were violated as they were in previous bubbles.

History repeats itself but never the same way.

Bluegrass Pundit-Politics

Blond Sagacity- Politics & Culture

The Daily Gut- Edgy

Yes And Not Yes- Investment Focus

The Micah Report-   Middle East Focus

I have a Schwab account that was closed out years ago. Because of the imperfections of the process of closing accounts it has a balance of eighteen cents.

If I call I will face 20 minutes of voice mail. I stubbornly refuse to spend 44 cents to get 18 cents. There is no e-mail address easy to find on the statement. They spend 35.7 cents to mail me a statement with an 18 cent balance. Times 24 months that is $8.57.

I would love to save them the money, if only they would make it a little easier.

a comment on my article at American Thinker :

Then there is the “expert” assumption of academic economists who are fond of saying things like “assume a perfect economy.” A joke written in reply to this conceited habit a tale of three men washed onto a dessert isle with 3 cases of canned food. The three are a chemist, an engineer and an economist.

The chemist takes some plants, boils them to create an acid which he then uses to eat through the cans’ metal top and acquire food.

The engineer makes a fulcrum from some wooden sticks and a rock, creating a device that smashes the can open from the side.

The economist sits there and says, “Assume a can opener” - and proceeds to starve.

From Randall Hoven at American Thinker

Graph of the Day December 24,2009

From the Wall Street Journal Political Diary-

to subscribe (highly recommended) go HERE.(only $7.95 a month for 5 postings a week- a real bargain.)

White House Chief of Staff Rahm Emanuel has led a charmed political life. Prior to his current gig, Mr. Emanuel was a senior political aide to President Clinton, a Congressman from Chicago and chairman of the Democratic Congressional Campaign Committee in 2006, when Democrats took 30 seats from Republicans and regained control of the House.

Mr. Emanuel has also done better than most at leveraging his public service for personal gain. After quitting the White House in 1998, Mr. Emanuel went to work for famed Wall Street dealmaker Bruce Wasserstein, a big Clinton backer and major Democratic Party donor. And despite no prior experience in banking, Mr. Emanuel became a very wealthy man in a very short period of time.

“Mr. Emanuel earned $16.2 million in a two-year stint working in Chicago for investment-banking firm Wasserstein Perella & Co.,” reported the Wall Street Journal last year. He then ran for Congress and took seats on committees that oversee Wall Street and quickly became a top recipient of campaign donations from the financial industry. In his last House race in 2008, the Journal reported, “Mr. Emanuel collected more money than any other House member from hedge funds, private equity firms and the broader securities and investment industry, even though he faced no serious opposition.”

Mr. Wasserstein, who died unexpectedly last week, went out with a reputation as more than just a big-dollar banker — he was a serious liberal who cared about politics and policy. He also never stopped being a patron to Mr. Emanuel, whom he praised earlier this year as having a “keen understanding of the interplay of regulatory aspects and corporate activity in financial advisory work.”

If by “keen understanding” he also meant Mr. Emanuel had figured out how to make the “interplay” work for him personally, who could argue with that?

HKO comment- Crony Capitalism at its worse!

Why the Stimulus Flopped
Under Obama, nothing is certain but death panels and taxes.

By Mark Steyn in National Review Online

read the entire article here.

Excerpt

That’s why the “stimulus” flopped. It didn’t just fail to stimulate, it actively deterred stimulation, because it was the first explicit signal to America and the world that the Democrats’ political priorities overrode everything else. If you’re a business owner, why take on extra employees when cap’n’trade is promising increased regulatory costs and health “reform” wants to stick you with an 8 percent tax for not having a company insurance plan? Obama’s leviathan sends a consistent message to business and consumers alike: When he’s spending this crazy, maybe the smart thing for you to do is hunker down until the dust’s settled and you get a better sense of just how broke he’s going to make you. For this level of “community organization,” there aren’t enough of “the rich” to pay for it. That leaves you.

Elliott Abrams writes in the Wall Street Journal “Why Israel is Nevous”

Read the entire article here.

Excerpt:

But the Obama administration has managed to win the mistrust of most Israelis, not just conservative politicians. Despite his great popularity in many parts of the world, in Israel Obama is now seen as no ally. A June poll found that just 6% of Israelis called him “pro-Israel,” when 88% had seen President George W. Bush that way. So the troubles between the U.S. and Israel are not fundamentally found in the personal relations among policy makers.

The question that belies the new administration’s infinite number of programs is whether each additional initiative adds followers or deletes them.

Will the gain of union support for the attempt at the card check legislation be more than offset by the loss of business owners, managers, and entrepreneurs? Will the quasi nationalization of the major auto companies gain or lose support? Will his stand on the Middle East gain or lose followers? Will his huge deficits attract or detract supporters?

Obama won with 52.9 % of the vote, and that was running against a very unpopular party tied to a very unpopular war with a disastrous economic collapse just months before the election. Many supported the new president, hoping he would govern more to the center than he ran.

There are liberals who are disappointed that he has not been as aggressive in winding down the war as they hoped, that he has not fully endorsed gay marriage as much as they wished. And there are independents whose support dwindles with each new program.

The danger of so many and such ambitious programs is that each one will erode a little support and the total will turn his support upside down.

Yet even this erosion may be moot if the Republicans cannot articulate a clear alternative and present a leader that can effectively deliver the message. Recycling Newt and Sarah will not work.

While the Republicans still seem lost in the wilderness, every new program Obama announces may be costing him support. With such an ambitious agenda he may sow the seeds of his demise- one cut at a time.

From Wikipedia

“In the economic sphere, many fascist leaders have claimed to support a “Third Way” in economic policy, which they believed superior to both the rampant individualism of unrestrained capitalism and the severe control of state communism. This was to be achieved by establishing significant government control over business and labour (Mussolini called his nation’s system “the corporate state”).”

My right wing friends cannot resist the characterization of Obama as a socialist.  He overtly talks of the need to redistribute the wealth and as such may fit the description, but we have been redistributing the wealth for some time.  We have one of the most progressive tax systems in the world; the richest 10% pay 55% of the taxes and the poorest 20% pay only 4%.  Obama may desire to make our system even more progressive or socialistic, but it is hard to claim that at a 36% top bracket we are capitalistic but at 40% we are socialistic.

What is clearly different under this president is the unprecedented encroachment into the business world.  Bush reacted to the financial crisis with huge sums to support the credit markets and it was probably necessary as much as it violates my sense of the proper role of government.  Part of this was caused by the government guarantees through Fannie Mae and part was caused by the absurd financial products comprising debt instruments so complicated no one could reasonably value them.

But under Obama this ‘control’ of the banking and financial industry has expanded to control or actual ownership of a large part of the auto industry, insurance industry, the health care industry, and the energy industry through the pending cap and trade legislation.  The strongly pro union card check bill, even when restoring the secret ballot, includes provisions to force arbitration if a contract is not signed 60 days after a successful election, allowing a federal bureaucrat to dictate wage and terms to a private company. The president has stepped over the law to dictate union benefits in the auto bankruptcy proceeding.  This is a form of corporatism that we have not seen since Mussolini’s Italy.

Mussolini also had financial crisis as an excuse. He was also supported by progressive elites both in Europe and in the United States. It was a decade later that fascism became more synonymous with racial and Anti-Semitic policies.

Fascist is pejorative and sounds extreme, but perhaps the word ‘corporatism’ relays the same message. The fact that ‘corporatism’ is the central economic policy of fascism conveys that the government takes extreme control over economic freedom.  Either word  is a more accurate description of Obama’s policies than mere socialism.