Due to the responses another blog of mine received, I decided to make another blog that goes into further detail of why the Federal Reserve needs to rescue the banks, and letting them fail would be a grave mistake with enormous economical consequences. MSN published an article a few months ago listing the 10 biggest mistakes the Federal Reserve has made thus far in this recession. I realize it's a little early for such hindsight, but bear with me. MSN stated that the #1 worst mistake our country has made was letting Lehman Brothers fail. Once that happened, it sent investors scrambling for the exits as that meant no company is 'too big to fail.' This panic also sent a run on the banks, which is blamed for the bankruptcy of Washington Mutual, as well as the further destruction of Citigroup, Bank of America, and others. This panic spread throughout the economy and news outlets, causing consumer spending to plummet and the Dow Jones to get into the 6000's.
As a moderate Republican, I side with the Republican party on most aspects, but this issue is simply impossible to ignore. In most economies we can allow major companies to fail, as inevitably a replacement will come, replacing the lost jobs. However, we cannot allow every major bank and insurance company in the nation to fail all at once, as this panic and devastation would easily plunge us into a great depression that could take years or decades to recover from. If some major banks fail, this will likely trickle down to all the financial institutions, as they are so tightly correlated, and virtually all of them are in financial trouble. For a long time I've criticized those who compared this recession to the Great Depression because things aren't close to that bad. I believe though that if the government does nothing, and lets the economy repair itself, things could get much, much worse, ultimately dwarfing the Great Depression. Thank goodness that isn't the case, as the Fed is rescuing all the major banks that could cause us to spiral out of control.
Some Republicans believe that the best policy is Pure-Capitalism. I believe that system is just about as bad as Pure-Communism. What we need is a Capitalistic market, with the regulations that are necessary for optimal economic growth, and government intervention when necessary. I hope that doesn't sound too much like Socialism, as I'm certainly not Socialist. No one wants to relive the Great Depression, that's why I'd rather have the government spend billions, knowing that much of it will be wasted. At the very least, this optimism is getting people to spend, in turn causing us to climb out of this awful economy.
I couldn't find that old MSN article, but here's an interesting one: http://www.financialexpress.com/news/letting-lehman-go-was-big-mistake-lagarde/370911/
5 comments:
As a right wing republican my instincts tell me I should oppose the government bailouts but when looked at from the macro perspective it is evident that government intervention is necessary at time such as this. It is important that we strike a balance between government intervention while still making businesses accountable through a free market system.
I think what is being said here is correct. The financial industry is unlike any other and should be treated as such. The only issue I have with the bailout is the lack of transparency that came along with it. Perhaps it was kept out of the public's ear so not to embarrass the banks, but I think the government should have attached a few added constraints and conditions before issuing out billions of dollars.
I certainly agree with Alexander that there should be more transparency. Even if the news is awful, I would rather know the truth than stay in a naive bubble. Also, it's really scary when the government isn't transparent, you don't know what they're hiding!
The claim that letting Lehmann fail was the biggest mistake needs strong qualification.
Everyone knew in March 2008 that Lehmann was next. People were surprised they lasted as long as they did.
Flash forward to the Friday before the Lehmann bankruptcy. Between that day and the middle of next week, what on earth changed about Lehmann that could cost the loss of so much value. The answer is nothing.
What happened was that on Friday everyone thought Lehmann was too big to let fail, and on Monday they found out that it wasn't. The biggest mistake was letting people get it in their mind that they were too big to fail by saving Bear Stearns. Having saved Bear Stearns, they had to save Lehmann Brothers. The problem is that they didn't.
I tend to agree with Anthony ... I think they should have saved both of them. In large part, that's because if I was in that position I don't think I would have had the guts not to: I just don't know what would've happened if we didn't save them.
The big picture is that open market operations are never about the quality of the assets. They are about making sure that the private market has the liquidity that it needs, and that the central bank thinks it should. What happened here is that when it came time to do a huge open market operation - exchanging "toxic" assets for more liquid one - the folks in charge blinked. And, I think a big part of that was that they didn't have the financial backing from Congress worked out in advance that they needed.
Wow...?????
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