Wednesday, November 4, 2009
Question Conventional Wisdom
"Conventional question: Did the government's quick intervention on Wall Street last year save us from another Great Depression? Alternative question, one that I prefer: Did government intervention make matters worse? ... Next, consider the view that the crisis was prolonged by a misdiagnosis that led to more interventions. When the crisis first flared up, government officials argued that high interest rates in the money markets were due to a shortage of liquidity rather than to risk on the banks' balance sheets. ... Now, with the recent one-year anniversary of the Lehman bankruptcy, people are discussing why the financial crisis worsened so much in the panic last fall. Many still say that the big government mistake was not stopping the failure of Lehman. I do not think the evidence supports that view. Of course the losses for Lehman's creditors and the run on certain money market funds were a jolt to the market. But far worse was the chaotic intervention by the government in the following weeks, including the Treasury Deparment's not vey credible description of how it would remove toxic assets from the banks' balance sheets, the huge amount of money it asked for with only two and a half pages of legislation and the scare stories it let loose about another Great Depression if the legislation was not passed. ... The government interventions during this time of panic were part of a pattern of ad hoc responses starting with the Bear Stearns bailout. No guidance was given following Bear Stearns about the circumstances under which another firm, such as Lehman, would be rescued", my emphasis, John Taylor (JT) at Forbes, 2 November 2009.
I agree with JT, a Stanford economics professor. Uncle Sam made things worse. Remember MLEC in its various incarnations, see my 22 December 2007 post: http://skepticaltexascpa.blogspot.com/2007/12/mlec-rip.html.