Classical Values :: Krisis? or Hyperbole?

September 18, 2008

Krisis? or Hyperbole?

Whatever it is, the Germans who write stuff like this certainly want to get people's attention over here in Amerika. I mean, look at this crap:

End of an Era

In fact, it really does look as if the foundations of US capitalism have shattered. Since 1864, American banking has been split into commercial banks and investment banks. But now that's changing. Bear Stearns, Lehman Brothers, Merrill Lynch -- overnight, some of the biggest names on Wall Street have disappeared into thin air. Goldman Sachs and Morgan Stanley are the only giants left standing. Despite tolerable quarterly results, even they have been hurt by mysterious slumps in prices and -- at least in Morgan Stanley's case -- have prepared themselves for the end.

"Nothing will ever be like it was before," said James Allroy, a broker who was brooding over his chai latte at a Starbucks on Wall Street. "The world as we know it is going under."

Many are drawing comparisons with the Great Depression, the national trauma that has been the benchmark for everything since. "I think it has the chance to be the worst period of time since 1929," financing legend Donald Trump told CNN. And the Wall Street Journal seconds that opinion, giving one story the title: "Worst Crisis Since '30s, With No End Yet in Sight."

But what's happening? Experts have so far been unable to agree on any conclusions. Is this the beginning of the end? Or is it just a painful, but normal cycle correcting the excesses of recent years? Does responsibility lie with the ratings agencies, which have been overvaluing financial institutions for a long time? Or did dubious short sellers manipulate stock prices -- after all, they were suspected of having caused the last stock market crisis in July.

The only thing that is certain is that the era of the unbridled free-market economy in the US has passed -- at least for now. The near nationalization of AIG, America's largest insurance company, with an $85 billion cash infusion -- a bill footed by taxpayers -- was a staggering move. The sum is three times as high as the guarantee provided by the Federal Reserve when Bear Stearns was sold to JPMorgan Chase in March.

The most breathtaking aspect about this week's crisis, though, is that the life raft -- which Washington had only previously used to bail out the mortgage giants Fannie Mae and Freddie Mac -- is being handed out by a government whose party usually fights against any form of government intervention. The policy is anchored in its party platform.

"I fear the government has passed the point of no return," financial historian Ron Chernow told the New York Times. "We have the irony of a free-market administration doing things that the most liberal Democratic administration would never have been doing in its wildest dreams."

I'm cynical, but it's hard to ignore, because that would be a form of denial.

But what form of denial would it be?

Why aren't the economists I occasionally read such as Arnold Kling, Greg Mankiw, and Megan McArdle in a similar state of panic?

I'm no economist, but my initial gut reaction is that what's driving stocks downward (and the concomitant panic thinking) might be connected to the huge AIG bailout. I'm not alone:

Heavy-handed federal bailouts started this mutually reinforcing spiral rolling downhill by scaring anyone still holding stock in similar firms. And other regulations make it more likely to end badly.

Makes sense to me. And of course regulations call for more regulations -- especially when they fail. So it really gave me an attack of "I-TOLD-YOU-SO-itis" to read this:

Every blunder of government regulation invites an understandable impulse to give failed regulators more money and power. Yet financial markets invariably notice looming financial problems (e.g., Enron) months before credit-rating agencies notice anything amiss - regulators even lag behind the rating agencies.

In the process of turning US taxpayers into involuntary stockholders in AIG, Fannie Mae and Freddie Mac, federal bullies shoved the voluntary stockholders into the ditch. Bear Stearns stockholders weren't treated much better.

If you're still brave enough to own stock in other financial firms not yet blessed with such enlightened assistance from the feds, those precedents should make you nervous. So how could anyone possibly expect these "bailouts" to improve market confidence?

Call me an ignoramus. Say I'm in denial. But right now it's not the market I fear; it's the government.

As to the German editorial panic over "the foundations of US capitalism," the election's just a little too close. I question their sincerity.

Above all, I question the timing.

posted by Eric on 09.18.08 at 09:51 AM

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Comments

I doubt a bailout would have been necessary if Eliot Spitzer had not forced Hank Greenberg into retirement and punched a bunch of holes in the bottom of the AIG ship during his run for govenor.

Bram · September 18, 2008 10:14 AM

Hmmm...the Germans are declaring capitalism dead and demanding more government intervention in people's lives. Maybe not the great depression, but it does remind me of the 30's.

Yes, I know, Godwin, I lose, but still...

That article reads to me like just another shallow piece of alarmism that insists on calling the flavor of the week the best ever, worst ever, whatever the needs of the storyline. Obviously, neither the author nor anyone quoted actually lived through the great depression.

tim maguire · September 18, 2008 11:06 AM

I must admit that I stopped reading at

"Since 1864, American banking has been split into commercial banks and investment banks."

A self-styled banking expert who is unfamiliar with the Glass-Steagall Act of 1933* has little credibility in my book.

Dummkoepfe.

*Glass-Steagall was the law that _actually_ split investment from commercial banks. Before the New Deal it was usual for the same institution to perform both functions. The recent takeoevers could be seen as completing the reversal of Glass-Steagall begun under the Clinton administration. One would think that Germans would be all for this development, since their banks have _always_ had commercial and investment operations under the same roof.

xj · September 18, 2008 12:24 PM

Whenever the financial markets experience a bit of turbulence, the German press collectively reaches into a drawer and pulls out its "End of Capitalism" boilerplate.

Here's a synopsis of current German political journalism: the now defunct East German state had a superabundance of Stasi agents and propaganda apparatchiks, and a shortage of everything else. After the wall fell in 1989, many of the newly unemployed pillars of the SED dictatorship found related positions in unified Germany. For Stasi agents, a related position meant a job in security work at a private business or a state institution. For the propaganda apparatchiks, it meant hiring on at the Spiegel, the Sueddeutsche Zeitung (Munich's own "Pravda on the Isar"), the state television broadcasters, etc., where they are now in a position of dominance. Their journalistic tactics are simple, tried and tested for decades in the GDR, and as old as propaganda itself: wildly overdramatize any difficulties the enemy (in the case of the "End of an Era" article, the enemy is capitalism, along with the US as its leading exponent) might suffer, and whenever possible, verbally humiliate him in the process.

As a consequence, it is futile to read most German press reports with the intent of informing oneself of events as they have actually occurred. It is rather an exercise in "reading between the lines": the reader must attempt to surmise a constellation of events which must have come to pass in order to stimulate the publication of the observed press reports. A physician who attempts to diagnose a deranged patient, on the basis of the patient's own description of his symptoms, is faced with a similar task.

Aurelian · September 20, 2008 05:28 AM

Any huffing and puffing grand eloquence by the German press needs to be taken with a HUGE grain of salt. I'm only paying attention to whether they are also yelling "...ein Volk, ein Reich, ein Fuhrer...", otherwise, it ain't nothing.

They need to put all that hot air to good use. Maybe filling up a Zeppelin as alternative air transport.

Blademonkey · September 21, 2008 12:34 AM

What is taking place here with massive amounts of federal guarantees, huge play money injections into the capital markets, etc. is right out of the prescription that Benjamin Anderson advocated in his "Economics & The Public Welfare" tome recounting the Great Depression.
Greenspan's career at the Fed was a perfect example of taking Anderson's advice - pump liquidity into the markets at the first sign of a crash. Anderson, chief economist at Chase in the 1930's, had been witness to bank runs, closures, and deflation.
What Greenspan and Bernanke have been doing however, is not comparable.

In the 1930's we were a creditor nation, with real savings, a tiny (by comparison to now) government/public sector, with gold backing the currency, silver coinage, and home mortgages at a fraction of the bubble of today.
But now when liquidity is pumped into the system it is being created out of thin air and is totally inflationary.

Whether you or Simon want to hear it or not, the situation we are heading into resembles the beginnings of 1920's German inflation.
You both know where that led.
Be prepared.

Frank · September 21, 2008 12:16 PM