Theme: Bailout
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Treasury Secretary Henry Paulson stepped off the elevator into the Third Avenue offices of hedge fund Eton Park Capital Management LP in Manhattan. It was July 21, 2008, and market fears were mounting. Four months earlier, Bear Stearns Cos. had sold itself for just $10 a share to JPMorgan Chase & Co. (JPM). Read more
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As we approach three years since the fall of Lehman Brothers, the incentives that led the financial sector to take on too much risk still exist. Read more
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The fiction of pervasive cluelessness is so vital to this movie’s very essence that the CNBC clips interspersed between scenes as a narrative device had to be “reread and, in some cases, reshot”—faked is another way of saying itRead more
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When Peter Orszag left his post as White House budget director last summer, it made perfect sense, on several levels, that he ended up in an office next to Bob Rubin.Read more
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The economy teetered on the brink but did not fall into the abyss. The bailouts, the stimulus, and adequate international political comity —each imperfect, even ugly—nevertheless prevented what was otherwise very likely: another Great Depression.Read more
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The world economic recovery, permitted by a massive injection of public spending into the economy, is fragile but real. One continent lags behind, Europe. Finding again the path of growth is no longer its priority policy. Europe has embarked on another path: the fight against public deficits. In the European Union, these deficits are certainly high - 7% on average in 2010 - but this is much less than the 11% in the United States. While American states whose economic weight is greater than Greece’s, such as California, are virtually bankrupt, financial markets have decided to speculate on the sovereign debt of European countries. Europe is in fact caught in its own institutional trap: states must borrow from private financial institutions, which obtain cheap cash from the European Central Bank. As a consequence, the markets hold the key to the funding of the states. In this context, the lack of European solidarity gives rise to speculation, all the more so when the rating agencies’ game accentuates the mistrust. Read more
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From an economic viewpoint, the most serious problem with the rescue programs was not that they further enriched the loathed bankers but that they exacerbated some serious incentive problems at the heart of the financial system. By extending trillions of dollars in loans, capital injections, and debt guarantees to troubled firms, the US government and its counterparts overseas had greatly extended the public safety net for banks and other financial entities. Left unchecked, this expansion will surely lead to more blowups, followed by even bigger bailouts. Read more
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From my perch in Moscow, the inimitable words of Yogi Berra come to mind as I watch the economic turmoil in Ireland and the contagion effects on others that constitute the soft underside of the eurozone currency area. The sense of déjà vu is palpable. No, I am not thinking about Greece when international bond markets turned against the sovereign debt issued by the Greek Government last May, as unprecedented as it may have seemed at the time.Read more
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Of all Obama’s appointments, the most damaging to his credibility with liberal supporters were Lawrence Summers and Timothy Geithner, the chief economic adviser and the secretary of the treasury. Geithner has the air of a perpetual young man looking out for the interests of older men: an errand boy. The older men in question are the CEOs of Goldman Sachs, AIG, and the big banks and money firms. Geithner at the New York Fed had enforced – or, rather, let flow – the permissive policy on mortgages that Summers pushed through in the last years of the Clinton presidency. Summers himself, renowned for his aggression and brilliance, came too highly recommended for Obama not to appoint him. The new president credited his adviser’s belief that there were only a few persons in America who could undo the harm of the mortgage crisis, and it happened that they were the very people who had caused the crisis. The Obama economic team, with its ‘deep bench’ of Goldman Sachs executives, might have done better if mixed with economists of other views like Joseph Stiglitz and Paul Krugman. Obama knew little economics, however, and he took the word of the orthodox. It would have been wiser, from a merely prudential standpoint, to consult Summers behind a screen. But Obama has always craved legitimacy in a conspicuous form.Read more
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The Republican opposition has been highly successful in turning “stimulus” and “bailout” into dirty words that cannot be used. The opposition narrative blames the crash of 2008 and the subsequent recession and persistent high unemployment on the ineptitude of government and claims that the 2009 stimulus package was largely wasted. There is an element of truth in this interpretation but it is far too one-sided. The crash of 2008 was primarily a failure of the financial markets and the fault of the regulators was that they failed to regulate. Read more
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