Welcome, Nicole Gelinas!
The Ricochet Book Club is delighted to welcome Nicole Gelinas--a much-anticipated event here at Ricochet, Nicole. Do you have questions about how to save capitalism from Washington and Wall Street? She's got the answers.
Don't forget, the five members who offer the best comments--as measured by the "like" button--will receive copies of our next book club selection.
Let me start: Nicole, it seems to me the most debatable suggestion you make is this: By 2008, it was too late. (Page 160, for those of you with your copies in hand.) I quote:
Could free markets have sorted out the mess without extraordinary government action? Yes, but only by destroying the remains of the financial system and possibly putting tens of millions of people out of work. Despite virulent public opposition to the Bush bailouts, society would not have tolerated the price that a sudden free-market correction of decades of financial excess would have exacted.
I wonder. I truly don't know what would have happened. What do other members of Ricochet think?
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May '10
Re: Welcome, Nicole Gelinas!
The credit expansion of the Fed greatly expanded the money supply and swelled the number of high risk undertakings, making institutional traders both able and willing to participate in derivatives-as-insurance contracts.
Sep '10
Re: Welcome, Nicole Gelinas!
Midget Faded Rattlesnake
Well, it may have more effect than regulations, but on the other hand, I know from my own family's experience that living through the depression does not necessarily make one fiscally wise.
What seems like noble frugality from one perspective may turn out to be "penny wise, pound foolish" from pretty much everyone else's perspective, and an aversion to risk grown to monstrous size impairs the ability to wisely choose among inevitable risks.
Our family is probably worse off, on balance, for one ancestor's preference for "depression-era virtues" over realistic risk analysis. These virtues have their costs, too. · Jan 14 at 1:50pm
I did not mean to imply that the depression impugned financial wisdom. Nicole correctly, I believe, posed that an inability to recognize risk and/or a disregard for it was the primary cause of our latest financial fiasco. The D. gave the country a good dose of risk aversion. I agree with your point that too much aversion is not financially wise.
Sep '10
Re: Welcome, Nicole Gelinas!
Midget Faded Rattlesnake
Well, it may have more effect than regulations, but on the other hand, I know from my own family's experience that living through the depression does not necessarily make one fiscally wise.
What seems like noble frugality from one perspective may turn out to be "penny wise, pound foolish" from pretty much everyone else's perspective, and an aversion to risk grown to monstrous size impairs the ability to wisely choose among inevitable risks.
Our family is probably worse off, on balance, for one ancestor's preference for "depression-era virtues" over realistic risk analysis. These virtues have their costs, too. · Jan 14 at 1:50pm
I did not mean to suggest that the deprission impugned financial wisdom on people. It did however give that generation a healthy dose of risk aversion. I believe that Nicole correctly identified an inability to recognize and/or a disregard for risk as the primary cause of the latest financial fiasco. I agree with your point that avoiding risk is not always wise.
Sep '10
Re: Welcome, Nicole Gelinas!
Sorry for posting twice.
Aug '10
Re: Welcome, Nicole Gelinas!
right wingah: So my question is were we ever really staring into the abyss or were we simply afraid of uncertainty? · Jan 14 at 12:57pm
Edited on Jan 14 at 01:09 pm
Based on what little I have learned since diving in to both After the Fall and The Big Short by Michael Lewis, the short answer to your question is that the lack of market discipline in our finacial system allowed nearly every investor in our financial system to drive us over the abyss (any staring involved would have been up mournfully as we free-fell).
There was no uncertainty to fear in September of 2008, the sky was in fact falling and it was certainly going to land hard on everyone.
I believe Nicole makes that case convincingly in the first first few pages of chapter 8.
Claire Berlinski, Ed.
Sep '10
Re: Welcome, Nicole Gelinas!
The quote from the book seems to contain false premises.
"Could free markets have sorted out the mess without extraordinary government action?" The housing crisis, the main impetus of the financial collapse, was caused by the financial institutions (Fanny & Freddie) socializing risk while privatizing profit. The bundling and selling of nearly worthless mortgages would not have happened with truly free markets, since there exists a huge risk of losing a lot of money in an authentic free market.
"Yes, but only by destroying the remains of the financial system and possibly putting tens of millions of people out of work." "Remains" implies a financial system too weak to withstand some sort of necessary reorganization, resulting in privatizing both future risks and rewards, and making sure everyone involved knew this. I disagree with this premise. And, at least millions of people got put out of work in any event.
"Despite virulent public opposition to the Bush bailouts, society would not have tolerated the price that a sudden free-market correction of decades of financial excess would have exacted." The correction did not have to be sudden--the free market always handles it in the end, if it's allowed to work.
Edited on January 15, 2011 at 12:49amSep '10
Re: Welcome, Nicole Gelinas!
welcome my fellow cfa it is interesting to see these arguments that confuse "ought" with "is" and we don't even know for sure what the consequences of what happened are much less what might have happened...regardless I've enjoy your articles and I'm delighted to see you on ricochet
Oct '10
Re: Welcome, Nicole Gelinas!
Michael, the Fed doesn't have a magic wand. It didn't create capital out of thin air; that produces inflation.
Where do you think all the money came from, flooding our economy? When the Fed started to tighten in 2004, long-term interest rates continued to fall. Our current account deficit hit 800 billion in 2006--two years after tightening had started; a financial crisis was inevitable!
Look at the global experience. All sorts of nations have had this problem: the IMF calls it "balance of payments crises." We're very, very lucky--the dollar is the "safe haven", so when investors were bailing out of our banks, they bailed straight back into our bond market.
Finally: If every bank had gone bankrupt, the dollar (by definition) would have ceased to exist. Your financial system is your currency. And if the U.S. dollar fell, the whole world would have entered a deep, terrible depression. Who knows, maybe even world war three.
Oct '10
Re: Welcome, Nicole Gelinas!
I think its reasonable to say, no one would've been able to access their money.
Imagine you're at an ATM, and nothing happens. It doesn't work; not for you, not for anyone across the country.
The resulting government bailout would have been much bigger, and little or none of it would be paid back.
May '10
Re: Welcome, Nicole Gelinas!
Joseph Eagar: Michael, the Fed doesn't have a magic wand. It didn't create capital out of thin air; that produces inflation.
Where do you think all the money came from, flooding our economy? When the Fed started to tighten in 2004, long-term interest rates continued to fall. Our current account deficit hit 800 billion in 2006--two years after tightening had started; a financial crisis was inevitable!
The money that the Fed uses in open market purchases is quite literally created "out of thin air," i.e., from nothing via its New York branch. The Fed has been rapidly expanding the money supply. The price inflation is here; I recommend considering the rise in commodity prices and the fact that December has been the best month for stock traders in 7 years. The money comes the Fed, no doubts about it.
Edited on January 15, 2011 at 6:02amNov '10
Re: Welcome, Nicole Gelinas!
Dan Holmes: The quote from the book seems to contain false premises.
"Could free markets have sorted out the mess without extraordinary government action?" The housing crisis, the main impetus of the financial collapse, was caused by the financial institutions (Fanny & Freddie) socializing risk while privatizing profit. The bundling and selling of nearly worthless mortgages would not have happened with truly free markets, since there exists a huge risk of losing a lot of money in an authentic free market.
Excellent point. What are your thoughts about the Community Reinvestment Act (sponsored by Sens. Dodd & Frank) and zealously enforced by the Clinton administration?
Sep '10
Re: Welcome, Nicole Gelinas!
Elizabeth Dunn
Dan Holmes:
"Could free markets have sorted out the mess without extraordinary government action?" The housing crisis ... was caused by the financial institutions (Fanny & Freddie) socializing risk while privatizing profit. The bundling and selling of nearly worthless mortgages would not have happened with truly free markets, since there exists a huge risk of losing a lot of money in an authentic free market.
Excellent point. What are your thoughts about the Community Reinvestment Act (sponsored by Sens. Dodd & Frank) and zealously enforced by the Clinton administration? · Jan 15 at 3:21am
The CRA represents a classic case of free-market distortion by the gov't, while proclaiming good intentions. It is the main cause of the housing crisis. It was begun under Carter, given milk teeth under Bush 41, and a full set of choppers under Clinton. It should be repealed.
It uses vague terms like "convenience and needs" and "meet the credit needs of the local community," and then explicitly delegates to the enforcement agencies the power to define these terms, all the while using the threat of denying applications to assure compliance with the agency-created definition.