Markets are sharply down, more Wall Street messiness is coming, and there’s plenty of blame to go around. But even as the financial press says all that, a current of confidence is apparent among those who saw this crisis coming and are glad Treasury Secretary Henry Paulson didn’t blink in his weekend dealings with financial institutions.
First, the fallout from the weekend’s events: The BBC reported today: “European markets opened sharply lower for a second day, with the UK’s FTSE 100 and Germany’s Dax both down 1.7%. Shares in Japan, South Korea and Hong Kong fell more than 5%, having been shut on Monday for public holidays. …
“The US stock market on Monday had its worst day’s trading since 9/11, with the Dow Jones index ending the day down 504.48 points, or 4.42%, at 10,917.51.”
Responding to the crisis, the Federal Reserve this morning pumped another $70 billion into the nation’s financial system to help ease credit stresses.
How did we get here — and where are we headed? In an analysis for the Associated Press, Tom Raum explained the background of the crisis this way:
“Alan Greenspan encouraged a housing boom that was destined to collapse. The White House and Congress were lax in overseeing the captains of finance.
“People bought homes they couldn’t afford. Investors eagerly bought mortgage-backed securities they didn’t understand. Human nature was a guiding force in markets that were first driven by greed and then shaken by fear. It turns out there’s lots of blame to go around for the spreading financial crisis.”
Seeds planted in the 1990s
Raum pointed out that “some seeds of the current crisis were planted in the late 1990s, when Congress and President Clinton reshaped the financial landscape. They removed Depression-era barriers between commercial banks and investment firms and allowed the creation of financial behemoths where, years later, the risks of underwriting risky subprime mortgages were somewhat hidden.”
Raum interviewed former Iowa Rep. Jim Leach, who was chairman of the House Banking Committee when Congress enacted the overhaul, writing that Leach “believes the current problems stem mostly from lawmakers’ unwillingness to more closely regulate either the mortgage giants Fannie Mae and Freddie Mac or investment banks.
“That has led to a proliferation of ‘new Wall Street instruments that came to be sliced and diced to the advantage of short-term profit-taking but long-term liabilities,’ Leach said. ‘Wall Street became better at sales than at financial judgment.’ “
Over the weekend, two more titans got their comeuppance. Lehman Brothers filed for bankruptcy after a frenzied search found no bailout and no buyers. The venerable Merrill Lynch will become part of Bank of America.
Still, writes Glenn Somerville in an analysis for Reuters, “As messy as financial market conditions are right now, the weekend decision by U.S. government officials to let Wall Street firms stand or fall on their own should strengthen them in the long run.
“Some analysts think more bailouts are possible and virtually everyone expects further failures like the collapse of 158-year-old Lehman Brothers, but the government took a solid step toward limiting a perception that it will backstop every faltering firm. ‘The government’s action drew a line in the sand in a troubling situation where no choice (to use taxpayer money) was the best choice,’ said Allen Sinai, chief global economist for Decision Economics in Boston. ‘That’s the single bright light in what remains a very dark situation for the U.S. and global economic situation.’ “
Treasury, Fed recalibrating
Somerville added, “As financial institutions crumble under the weight of a housing crisis that shows scant sign of easing, the U.S. Treasury and the Federal Reserve are aiming to recalibrate their earlier willingness to offer loan guarantees, as they did with Bear Stearns in March, or take over companies, as was done with Fannie Mae and Freddie Mac earlier this month.”
He again quoted economist Sinai: “Throwing these problems back in the hands of the private sector — telling them we’ll help broker solutions but don’t count on us to be the solution — is the right solution. The body politic has had enough of bailouts.”
But while the “recalibration” by the Treasury and the Fed is widely seen as the right move, analysts also predict that economic conditions will deteriorate further before Wall Street sees improvement.
“Make no mistake, they will deteriorate,” writes business columnist Steven Pearlstein in the Washington Post.
“The developments of the last two weeks, while dramatic, are simply part of the process by which the markets and the economy are adjusting to the bursting of a massive credit bubble. That bubble, which artificially inflated the value of stocks, bonds, real estate and commodities, diverted too much talent and resources to the financial sector and encouraged households and governments to live beyond their means. The process for correcting these excesses is never neat or even fair. The challenge for policymakers is to keep that process as orderly as possible without trying to protect failing companies or prevent the inevitable decline in incomes and asset prices.”
Tougher regulations proposed
The AP’s Raum notes that proposals “are afoot in both parties to clamp down with new regulations. Bush’s treasury secretary, Paulson, is the architect of a proposed package of tougher regulations for investment banks, including giving more oversight powers to the Federal Reserve.”
But Raum gives the last word to David Jones, chief economist at DMJ Advisors in Denver, who says, despite the widespread calls for stricter rules, that “regulation will never solve the entire problem.
“That’s because the problem is basically human nature, which will always fluctuate between greed and fear, between euphoria and despair, between complacency and panic. That’s always going to happen.”
Susan Albright, a managing editor of MinnPost, writes about national and international affairs.