Krugman: Russian Roulette

Discussion in 'Economics' started by scriabinop23, Sep 15, 2008.

  1. Is Paulson taking his mission of avoiding 'moral hazard' too far? (after years of committing that very same moral hazard as head of GS) A coincidence that a short time period on the job and three of his former competitors are wiped out, leaving only one (Morgan Stanley) ?? If Paulson returns to i-banking, his integrity should definitely be questioned...

    Published: September 14, 2008
    Will the U.S. financial system collapse today, or maybe over the next few days? I don’t think so — but I’m nowhere near certain. You see, Lehman Brothers, a major investment bank, is apparently about to go under. And nobody knows what will happen next.

    Skip to next paragraph

    Paul Krugman

    Go to Columnist Page » Blog: The Conscience of a Liberal Readers' Comments
    "Unregulated fast growth isn't such a bargain if it's built on foundations that collapse."
    Noah, Washington, DC
    Read Full Comment »
    To understand the problem, you need to know that the old world of banking, in which institutions housed in big marble buildings accepted deposits and lent the money out to long-term clients, has largely vanished, replaced by what is widely called the “shadow banking system.” Depository banks, the guys in the marble buildings, now play only a minor role in channeling funds from savers to borrowers; most of the business of finance is carried out through complex deals arranged by “nondepository” institutions, institutions like the late lamented Bear Stearns — and Lehman.

    The new system was supposed to do a better job of spreading and reducing risk. But in the aftermath of the housing bust and the resulting mortgage crisis, it seems apparent that risk wasn’t so much reduced as hidden: all too many investors had no idea how exposed they were.

    And as the unknown unknowns have turned into known unknowns, the system has been experiencing postmodern bank runs. These don’t look like the old-fashioned version: with few exceptions, we’re not talking about mobs of distraught depositors pounding on closed bank doors. Instead, we’re talking about frantic phone calls and mouse clicks, as financial players pull credit lines and try to unwind counterparty risk. But the economic effects — a freezing up of credit, a downward spiral in asset values — are the same as those of the great bank runs of the 1930s.

    And here’s the thing: The defenses set up to prevent a return of those bank runs, mainly deposit insurance and access to credit lines with the Federal Reserve, only protect the guys in the marble buildings, who aren’t at the heart of the current crisis. That creates the real possibility that 2008 could be 1931 revisited.

    Now, policy makers are aware of the risks — before he was given responsibility for saving the world, Ben Bernanke was one of our leading experts on the economics of the Great Depression. So over the past year the Fed and the Treasury have orchestrated a series of ad hoc rescue plans. Special credit lines with unpronounceable acronyms were made available to nondepository institutions. The Fed and the Treasury brokered a deal that protected Bear’s counterparties — those on the other side of its deals — though not its stockholders. And just last week the Treasury seized control of Fannie Mae and Freddie Mac, the giant government-sponsored mortgage lenders.

    But the consequences of those rescues are making officials nervous. For one thing, they’re taking big risks with taxpayer money. For example, today much of the Fed’s portfolio is tied up in loans backed by dubious collateral. Also, officials are worried that their rescue efforts will encourage even more risky behavior in the future. After all, it’s starting to look as if the rule is heads you win, tails the taxpayers lose.

    Which brings us to Lehman, which has suffered large real-estate-related losses, and faces a crisis of confidence. Like many financial institutions, Lehman has a huge balance sheet — it owes vast sums, and is owed vast sums in return. Trying to liquidate that balance sheet quickly could lead to panic across the financial system. That’s why government officials and private bankers have spent the weekend huddled at the New York Fed, trying to put together a deal that would save Lehman, or at least let it fail more slowly.

    But Henry Paulson, the Treasury secretary, was adamant that he wouldn’t sweeten the deal by putting more public funds on the line. Many people thought he was bluffing. I was all ready to start today’s column, “When life hands you Lehman, make Lehman aid.” But there was no aid, and apparently no deal. Mr. Paulson seems to be betting that the financial system — bolstered, it must be said, by those special credit lines — can handle the shock of a Lehman failure. We’ll find out soon whether he was brave or foolish.

    The real answer to the current problem would, of course, have been to take preventive action before we reached this point. Even leaving aside the obvious need to regulate the shadow banking system — if institutions need to be rescued like banks, they should be regulated like banks — why were we so unprepared for this latest shock? When Bear went under, many people talked about the need for a mechanism for “orderly liquidation” of failing investment banks. Well, that was six months ago. Where’s the mechanism?

    And so here we are, with Mr. Paulson apparently feeling that playing Russian roulette with the U.S. financial system was his best option. Yikes.
  2. Paul 'I'm a Clinton administration Democrat" Krugman has yet to write a single column offering either advice or a solution to the mortgage default problem. Obviously the crisis-not of liquidity but of falling asset prices- extends beyond the "banking" system. Ask Bill Gross, Vanguard and many hedge fund investors.

    Krugman to his credit is consistent though. He's consistently pompous, shallow, partisan and un-noteworthy.
  3. Glad I'm not the only one annoyed by this socialist fool.
  4. lrm21


    I like Krugman columns. They make great liners for my cock fighting pens.

    Seriously Krugman articles are as useless as the rag that prints them.

    Shadow Banking..yadad yada....I warned 6 months...yada yada...Paulson is playing russian roulette...

    Paulson is fucked him and Bernanke have the worst jobs in the world.

    If I was Paulson I would hold a press conference and just say

    Fuck you..Fuck You.. and Fuck You America... Good Day.
  5. dave74


  6. zdreg


    "if paulson returns to the I sector"
    that is a given. do fish swim?

    he will be welcomed with open arms as he has being giving his old pals the nod and wink that he wants a weak dollar while pretending he has a strong dollar policy,
  7. Paulson is much wealthier than say Rubin when he was T-Sec. Paulson has fuck you money. Min: low 9 figures. He's also a bit older. I'd be surprised if he ever works again.

    And yes that dollar bs of his drove me insane!
  8. I remember when Paul Krugman was the lone wolf in the wilderness criticizing G.W. Bush for his policies. Now the majority of Americans seem to agree and are unhappy with G.W. Bush. He seems far more prescient than others. Is there currently a right leaning economist/columnist that comes anywhere close to displaying the same intellectual rigor? Who?

  9. Hmm... Is there currently a right leaning "fill in the black for your choice of an occupation" who comes anywhere close to displaying intellectual rigor?