(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.

Science is a realm of discovery, skepticism, understanding, confirmation and challenge. But throughout history science has been polluted by political considerations.  In the Middle Ages the church considered any theory of the universe without the earth at the center heresy.

More currently science has been polluted by attempts to attach the certainty of science to the unknowable and the uncertain.  When science is hijacked to support political causes  skepticism and confirmation are treated as heresy the same as  the church condemned the heliocentric theories of the Middle Ages.

Wall Street bankers deluded themselves into thinking that the vastly complicated uncertainty of global markets and risk could be made certain with complicated mathematical formulas.  Blinded by vast sums of money they believed the ridiculous because they so wanted to. A philosophical understanding of risk was replaced with delusional mathematical certainty.

A political push to control wealth is served by the global warming/ climate change hysteria; credentialism and intelligence offers no more clarity to the future than the Gaussian Cupola Formula offered Wall Street.

That anyone could purport to know the future climate of the earth decades out with any degree of certainty defies common sense. The models offered to support such “science” are no more credible than the formulas created by the PhD quants on Wall Street who proposed to turn junk mortgages into AAA securities.

Tips to Rabbi Bat-Or.

I do not know if this is a real ad, but it really doesn’t matter.

Brown’s victory over Coakley is certainly a setback for the current administration no matter how they spin it. But another major development in the electoral process was largely missed.

When Ben Nelson flipped for Obama Care in the Senate it was seen as a betrayal of his pro life principles.  Yet Nelson likely thought he was doing his job of bringing home the bacon for his Nebraska constituents by getting such special treatment to offset his state’s higher Medicaid cost.

In the past anti-incumbent fever was directed at other politicians; ours was OK as long as he succeeded in protecting his constituency’s interest. In this case the uproar from Nelson’s own state was overwhelming. This was very different;  the governor and the citizens of Nebraska were no longer concerned in benefiting from special deals if it meant voting for bad legislation. Such a voter attitude could spell the end of pork barrel politics.

The climate of voter outrage is reaching beyond anti-liberal, partisan preference, and even anti-incumbent.  A certain level of ‘corruption’ that was an accepted part of American politics is being soundly rejected.  Closed door meetings, blatant partisanship, unaccounted for expensive trips, unmitigated arrogance, broken promises, and blatant hubris and hypocrisy is being rejected as components of our political scene.

This change will hopefully encourage a new kind of political leader from both parties to enter the political scene.  The exit of the old guard who clearly sees that they cannot get re-elected will help this process.

A new center is emerging that in intolerant of political gain at any cost. I don’t think they are going to back down.

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.

1.      blaming economic crises on “greed” is like blaming plane crashes on gravity.- Thomas Sowell

2.      “crony capitalism” is to capitalism what National Socialism (Nazism) is to socialism- hko

3.      ‘Those who hammer their guns into plows will plow for those who do not.’

4.      Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly, and applying the wrong remedies.  Groucho Marx

5.      The urge to save humanity is almost always only a false-face for the urge to rule it.- Mencken

6.      the government is no more capable of creating wealth than a hall of mirrors is capable of creating people- Peter Schiff

7.      We always rediscover basic principles after we learn the cost of ignoring them

8.      I never hear the word “community” to justify fiscal responsibility; only to rationalize the opposite.- HKO

9.      What truly breeds discontent is the illusion that Government can solve all of our problems.- R. Samuelson

10.  The problem is that most of those claiming to have the right answer don’t even know the right question.- HKO

11.  “A nation of sheep will beget a government of wolves.” Edward R. Murrow

12.  the biggest threat to business in America is liberal democrats and populist republicans

13.  Not every short term crisis requires a long term solution.

14.  18 of the last thirty medical Nobel Prize winners were American- yet our health care system is broken?

15.  “Every snowflake pleads innocent, but it’s still an avalanche.”

16.  Arrogance and ignorance is a dangerous combination

17.  “There is no difference in the ultimate fate of all chained economies, regardless of any alleged justifications for the chains.” Ayn Rand

18.  It is comforting in times of stress to go back to the fairy tales we heard as children, but it doesn’t make them less false.  John Cochrane

19.  Skepticism is the price knowledge pays for truth

20.  You do not win with an exit plan; you exit with a victory plan.-  HKO

21.  “I see as much misery from them that seek to justify themselves as from them that seek to do harm.” from HBO’s Deadwood.

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.

tips to Bruce Tuchman