The NY Times has an excellent, and brief, six-step synopsis of what went wrong in our economy. In essence it points to a lax regulatory environment (with derivatives, corporate leverage levels, and subprime lending), failed policy responses (to foreclosures and Wall Street bailouts), and the colossal mismanagement of the TARP bailout money. Much of the article is old hat now, but for those of you having trouble keeping score at home, it's a quick score sheet that's not too technical (Full Disclosure: I also like it because it mirrors what I say in the last three chapters of my book).
In another NY Times article it's made clear that we're not going to get out of this mess until we clean up the "insurance" gambles (credit default swaps) that were bought and sold between financial institutions.
In this market we had market players buying and selling insurance for products, like debt contracts, that they couldn't pay off if the product they were insuring went south. What these guys did would be akin to you selling outrageously cheap car insurance, knowing full well that you wouldn't be able to pay out if people started wrecking their cars. Worse, apart from never planning to pay out on claims, the only thing you were really after was the monthly premiums. Bailing out this group of market players not only rewards bad behavior but will cost trillions of dollars.
Or we could do the smart thing and force losses on those who were gambling on America's economy going south, and didn't really care what they bought as long as they had "insurance." Think about it. If you purchased a bad insurance policy for your car the government wouldn't say, "that's alright, we'll pick up the tab for your wrecked car." We need to force losses on those who perpetuated an irresponsible system, gambling that the government would eventually cover their bets (by enforcing contracts, or by bailing out the industry). Read the article because it has several good recommendations.
What does this all mean? It means we're in a real mess. We've already encumbered at least $2.9 trillion in new debt but have little to show for it. Socializing the losses by having the American taxpayer pick up the pieces for stupid behavior is not good policy.
This is one of the reasons why I believe that partial nationalization of America's failing financial institutions is the best option available. Why? Because we get some control over bank actions (which we have to bailout anyways), and it will put the fear of God into an industry that has yet to learn any lessons from this mess (as they continue to pay out billions in bonuses, refuse to discuss what they're doing with TARP money, etc.).
The NY Times discusses the nationalization issue here.
- Mark
No comments:
Post a Comment