Opinion - by Charlie Eisenhood on Monday, September 15, 2008 23:56 - 7 Comments - 19 views
The Dow closed down over 500 points today, its biggest drop in over six years, as Lehman Brothers Holdings Inc., the fourth biggest investment bank in America, filed for bankruptcy. It has also become increasingly clear that the economic downturn has no end in sight.
Over the weekend, Lehman was hoping to find a buyer to take over the firm and its more than $613 billion in debt. But, when the Fed refused to backup any deal, interested parties walked away, unwilling to assume the risk.
Paul Krugman, economist and New York Times opinion columnist, wrote today that Henry Paulson, the treasury secretary, is “playing Russian roulette with the U.S. financial system” by not backing up a buyout of Lehman. But the alternative isn’t much cheerier. The Fed, as this Economist analysis points out, was unable to assist Lehman because it would be a clear indicator that they would back up all risk-taking in financial markets, encouraging further risk-taking and potentially costing taxpayers millions of dollars. (The Fed recently bailed out mortgage giants Fannie Mae and Freddie Mac and hedge fund Bear Stearns.) The Fed was damned if they did and damned if they didn’t.
Ultimately, Krugman has it right when he says, “The real answer to the current problem would, of course, have been to take preventive action before we reached this point.” Regulating our markets has got to become a high priority in Washington, no matter who our President is come January. But it worries me that John McCain, AFTER acknowledging the “tremendous turmoil” on Wall Street, said today, “the fundamentals of our economy are strong.”
Wha??
7 Comments
Chris Kennedy
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@ Chris: That’s a pretty extreme policy. I’m certainly not advocating band-aid fixes – the whole concept behind regulation is making sure we DON’T need such temporary solutions.
But allowing “the corrupt institutions” to collapse would cause extreme damage to US and global markets, likely costing shareholders billions and really hurting everyone’s pocketbook. Honestly, it’s not even a feasible solution.
As you say, “the next decade or two might be hard.” Uh, yeah. The crumbling of global financial markets might be hard.
And, actually, deregulation is what got us into this mess – the subprime mortgage crisis grew out of, yes, greedy investment banks, but also a glaring lack of oversight. The theoretical concept of markets policing themselves with no regulatory oversight has proven to be disastrous when applied to real-world financial systems.
Chris Kennedy
Regulations to keep corporations from cheating or engaging in dangerous activities are good for sure. I should be more careful with my words.
The manipulation of the economy by our government isn’t (err, the Federal Reserve). Manipulation of interest rates, printing money and regulation of the markets have just provided for easy money when we should have been taking a hit from the .COM bubble. Blame Greenspan/Bernanke and company.
The Fed has been propping up the entire system for so long there is almost no way out of it. All they have left to do is continue the disastrous monetary policies that got us here. Except now that the world is losing faith in the dollar, they have nothing to fall back on.
If we wiggle our way out of this mess with more governmental interference it is just going to crash even harder five years down the road.
I mean, we just effectively nationalized one of the largest private financial institutions in the world. This can’t be leading to anything good, haha.
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regulating the market is what got us into this mess. Further regulation will only lead to band-aid fixes, propping up the bubbles only to have them pop later on, but with more even more disastrous effects.
No regulations is the answer. Let the corrupt institutions that made bad decisions collapse. The next decade or two might be hard, but after, the system will be cleansed. No one wants to listen to the long-term answers though.
Go Ron Paul.