People might think that Wilt Chamberlain or Michael Jordan were the best basketball players of all time, and maybe they were. But here’s a little secret. Any parent whose had just a little practice can sink one from the foul line. All it requires is that you replace the basketball with a small bag containing a used diaper. Parents don’t miss. The consequences of doing so would be, well, messy.
Author: Eliot Lear
What Caused This Crisis?
I am sure I’m not that different from many others when I ask the simple question, what happened? How did the banks get into such a mess? What didn’t they see, and what regulation failed? Was the reserve ratio that the federal reserve demands too low? Did debt move from regulated to unregulated, and if so, why would that have caused a failure of regulated banks? How is it that the vast amount of debt went unrecorded until recently? And what are we doing wrong now?
The New York Times offers a new insight into what had happened. According to this article, a decision in 2004 by the SEC, headed by William Donaldson at the time, permitted banks to exceed the reserve ratio in their investment houses, and money seemingly flew freely between the two. There was meant to be oversight of the banks’ health at the time, but that oversight never happened.
Why did the banks seek this change in 2004? They did not believe they could compete against the large investment houses with so much money tied up in case of a credit crunch. Put another way, we forgot some of the lessons of the 1920s.
And so it’s now obvious to all. President Bush has not only presided over the worst financial debacle since the Great Depression, but he and his team failed to learn from the mistakes of that era, making him worse than President Hoover, in my book.
What do we need to do to fix the problems? Some of it has already happened. Banks have become very conservative, and perhaps are leaning too far: it’s very hard to tell when the country is teetering on a recession. Some of that conservative nature needs to be codified by reversing the 2004 decision or requiring investment houses to meet the reserve ratio. In order to figure out which we have to question whether or not we can let a large investment house fail. If we cannot, then more regulation is appropriate. One way to split the baby is to require regulation of total assets and debt above a certain number, say the $5 billion talked about in the article.
A new take on an old song…
Today’s blog is courtesy of Kara Luiz, who is absolutely hilarious!
Be honest. You do this too.
Sarah Palin is NOT showing up
NPR’s Morning Edition today had a report on Governor Sarah Palin. Apparently she is taking a page from President Bush and carefully controlling media access. In other words: limited interviews, and no press access. What little press she has had has been bad. Between the ongoing investigation and her refusal to release her income tax records, one has to wonder if she really is ready for her current position of governor, much less that of vice president. One also has to wonder why the people of Alaska put up with this sort of behavior.
Say what you will about Senator Biden, either through intent or incompetence, he has a long history from which we can judge (and have). This leads to the first rule of governing: you have to show up, and Sarah Palin is not.
Worse, even when she makes statements they are plattitudes. Telling Americans not to question Israel is as destructive to the democratic process here at home as it is to Israel and her neighbors. We cannnot be an honest broker if we do not question all parties, and that is what the region needs most of all. Even the current administration recognizes the mistakes it has made. These were lessons that ought not to have been learned in office, and we certainly cannot afford for another administration to learn them again.
We need better.
Will the Bail-Out Help?
Today some of the questions many people wonder are precisely what has gone wrong, what is going wrong, and what will a bailout fix. What has gone wrong is that the credit default swapping market was not sufficiently capitalized to account for a heavy rate of defaults. Normally banks are required to meet a reserve ratio as part of their regulation. However, when debt is sold to non-bank entities, like Merrill Lynch, they no longer have to meet a particular reserve. One of the requirements for Goldman, now that they are a bank, will be to meet this reserve. This is why they needed to find a sugar daddy, like Warren Buffet.
What is going wrong still is that now that banks have been burned they have become increasingly more conservative, and have refused to loan not only home owners money, but also businesses money. Businesses, in turn, are being increasingly conservative with their precious dollars, for fear that they won’t be able to get more of them. Because of this the U.S. is likely to suffer a recession, and no place will suffer worse than the entrepeneurial capital, Silicon Valley.
There is also the matter of all the failed loans. We don’t know where all the debt is, because banks can take their sweet old time deciding when a loan has failed, and hence reporting it to their stockholders. The bailout will give creditors incentives to get rid of debt that is likely bad.
What the bailout may not fix is the confidence problem that creditors now have. Creditors may, however, be of two minds, one being that they could fail by taking on too much debt, and the other being that the U.S. government will provide a backstop to any serious failure. If the latter is true, even if unwsie, then those companies will make capital available.
Who wins in the current climate? Large companies that are their own banks can take advantage of their position, because there will be fewer smaller disruptive competitors. Venture capitalists will win because they will be able to drive better deals with startups. Employers on the whole will win because the job market will slacken.
The consumer, however, may not win. The cost of imported goods and services remains high in this environment, and is unlikely to change for some time, until capital markets open up again. This is because the dollar remains near all time lows. Worse, because other economies are beginning to faulter, we will not be able to export our way out of the hole (we’ve been doing that for some time).
Put another way, everyone is still in for a rough ride.