What to say of the events on Wall Street this past week? Probably the best summation for what it will mean in the future is this article from a Weekly Standard (U.K.) editor, which is full of excellent quotes of which I will post one:
President George W. Bush, Fed chairman Ben Bernanke and treasury secretary Hank Paulson all declare their preference for free-market solutions and a desire to minimise moral hazard. But they sound like François Mitterrand in mid-1983 when he abandoned his socialist programme commun in the face of capital flight and a collapsing franc, all the while proclaiming his devotion to socialism.
Just so. Fortune magazine weighs in on what the bailout might cost (begin at 1,000 billion and adjust upward). This will tie the hands of any coming president on any social or financial issue, what little the U. S. can afford will be poured down the black hole of bailing out the investment banks.
Joe Nocera at the New York Times weighs in with an excellent analysis of what the government did and whether it is going to be useful at an article appropriately entitled “All Hail Mary Pass, But No Receiver in the End Zone.” A couple of the more stupid ideas the Treasury has put into place: 1. Banning short selling of financial stocks. This is a real joke. I find it ironic that President Bush said of short sellers: As President Bush put it Friday, short sellers are “intentionally driving down particular stocks for their own personal gain.” Hmm, I don’t think he blamed speculators when oil prices ran to $150 per barrel, nor did they outlaw speculation in oil. Disgusting. Nocera’s theory (probably pretty accurate) is that the SEC is trying to coverup their own culpability by banning short sales of financial stock.
Then again, maybe the S.E.C. is trying to cover up its own culpability in this crisis. Four years ago, the agency pushed through a rule that allowed the big investment banks to take on a great deal more debt. As a result, debt ratios rose from about 12 to 1 to more like 30 to 1. Guess what Lehman’s debt ratio was when it went bust? Yep: 30 to 1.
At best all of this will calm the markets and “kick the can down the road” for a few days/weeks/months. This is always and everywhere the government’s approach to disasters and it never works. It ends up making the situation worse than it would have been. See the book “Fiat Money in France” for a guidebook on what is likely to happen.