Article: The Disaster

For months now people have been putting their minds to describing what happened last year to the financial sector and the markets and what will happen this year as a result. So far we have failed to get a good purchase on the squirming body of knowledge and, even then, it seems that President Obama and Secretary of the Treasury Geithner are missing the point. Perhaps we are missing the point. Maybe the point is that public commentary is part of the problem, or maybe it is that the business of making money from money is inherently unfair and in our fatheadedness we suppose that we know how to win, but actually we don't. The good news for progressive liberals is that President Obama had Drs. Paul Krugman (Princeton and NYT) and Joseph Stiglitz (Columbia) for dinner the other night, and so we can be assured that these two heavy-hitters got to at least second base. Obama now understands from some of the best, what the liberals think he is doing wrong ... or at least doing too little of. Then along comes Judge Richard A. Posner with a book called A Failure of Capitalism: The Crisis of '08 and the Descent into Depression, more than adequately reviewed and commented upon by Robert M. Solow in the New York Review of Books. Where Posner strikes a nerve, Solow is sure to give him credit, but in general Solow does not appreciate the work all that much, and you will get the impression from the review that Posner is cranking books out for more than one reason, but not excluding the profit motive. And this leads us one step closer to the realization that during any crisis, whether it is a bonafide disaster, a deep recession, or a depression, people will try to attract attention to their ideas about it with scant interest or responsibility for the consequences of overstating their case. So, the question that emerges from the book review is not really whether the recession is actually a depression. Solow thinks it is not, but he hastens to add that the several failures within our economic system are not over and NO ONE knows yet how deep the damage will go. The real question is how to deal with the situation in an age where direct participants at the professional level still do not know what hit them or why AND where investors, several removes from any inkling of what a derivative actually is, need to be spared the gruesome details else they become permanently traumatized and lose all hope for regaining their confidence in the "system." As Solow points out, the situation is several situations each feeding backwards and forward into the other situations. The sub-prime real estate problem affects a bubble made up of prime and not-so-prime real estate paper. Perforations of the real estate bubble quickly affected the stock markets, which soon realized that some of the equity in banks and super-banks was problematic and perhaps already so severely compromised that finance—credit—dried up almost instantly, sending signals into real estate, industry, commerce, and household planning. Each of these took prudent action, albeit belatedly, and sent additional signals back through the normal and the press conduits, reassuring everyone along the line that the only way out was to stop doing what they are supposed to do and let the dust settle. The only problem with playing the game of Monopoly this way is that real markets and real finance cannot take a break to let things reorient themselves. Into this situation arrives Barack Obama and a profoundly democratic view of his new job. Remember, he said he would be president of all of the country, which happy liberals in the ensuing months quickly and spontaneously forgot. The first clue that Obama is on the right track, given that imperative to govern to that hypothetical middle political position, is Solow's comment that the damage done to Wall Street and "bankers row" was so substantial that there was neither time nor prudent necessity to reorganize these sectors first. He plainly says that reorganization is more than inevitable, but it will not happen until the bilge pumps are all on line, the ship stops sinking, and the passengers are all safe, in or near life-vests and life-boats. Put this way, Obama's strategy is not only reasonable, but obvious. The other good news is that the "stress tests," which have been hectored and gossiped to death before they were even deployed have proved that both Bank of America and CitiCorp are not financially stable. JPMorgan Chase, Goldman Sachs, and others are, and now that the Good Housekeeping seal has been put on the solvent institutions, they can be allowed to pay back their TARP money. This obviates the invidious conclusions that would have been drawn—inside a functioning market, by the way—had they paid off (or down) their TARP money without the federal stress test guaranteeing the distinctions among institutions. Conservatives have ballyhooed and bellyached about this for over a month without the slightest bit of understanding of the problem. Yes, of course, the CEO of JPMorgan was playing chicken with Obama and Geithner, but they prevailed, and the CEO was made to eat his hat in public. The political situation out here in the blogs and press is the problem of attention span and intellectual resources. There will be a time, probably in 2010, probably not sooner, when the reorganization of finance and the reorganization of stock markets will be on the table. Some among us must understand that moment and be out here screaming for sufficient reforms in the faces of born-again capitalists of Wall St. and bankers row. Somehow we have to remind them that their rebirth is provisional, that the plug can still be pulled, and that their best interest is to use their assets in the financial sector and not convincing government that the least regulation is the best. It may be that regulation will be stringent and planetary. JB