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We can be optimistic about the effective handling of this crisis based on several factors. The Great Crash of 1929 has taught everyone lessons in what to do and, more importantly, in what not to do. Monetary policy is being loosened, not tightened: we can thank Milton Friedman’s influential analyses for that. Fiscal policy will be expansionary, not deflationary: we all live in the age of John Maynard Keynes, whose fiscal prescriptions were unavailable in 1929 and grew out of the mistaken doctrines and policies of that time. The Smoot-Hawley tariff of 1930, which led to “competitive” increases in protectionism by all, accentuated the Crash. No one is willing to repeat that error.
—Jagdish Bhagwat: FT
Bhagwati goes on to say, “Besides, the ideology of the US is a lack of ideology.” Tell that to the RSC and Representative Shelby. Nonetheless, could this abrogation of principles presage a healthier discourse with ideology?
And to the title of the piece: But with financial innovation, the downside can be lethal – it is “destructive creation”. We have to work hard at defining the downside scenarios.
Conditions in the region’s manufacturing sector deteriorated significantly in October, according to firms polled this month.
The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from 3.8 in September to ‐37.5, its largest one-month decline ever.
Capacity utilization, which measures the proportion of plants in use, fell to 76.4 percent from 78.7 percent the prior month, which was lower than the Bloomberg median estimate of 77.9%
The housing market continues to be a primary source of weakness in the real economy as well as in the financial markets, and we have seen marked slowdowns in consumer spending, business investment and the labor market. Credit markets will take some time to unfreeze.
We need to get financial institutions recapitalized, but that’s going to be difficult to do unless we stop falling house prices. The government is basically the mortgage market at the moment and so why not use that power?
The average home price to annual rent multiple for the last 20 years is 15 times annual rents.
”There were always those who told us that taxes couldn’t be cut until spending was reduced,” the President [Reagan] said in his first month in office. ”Well, you know, we can lecture our children about extravagance until we run out of voice and breath. Or we can cure their extravagance by simply reducing their allowance.” Are we to believe that it never occurred to him the children would plunge into debt?
The large lesson is simply this: President Reagan thought it was possible to weaken American government without weakening American influence. It is not possible.
…The seeming economic collapse of the 1980’s has not been the result of ”imperial overstretch” but of internal, somewhat conspiratorial politics.
—DP Moynihan, Debunking the Myth of Decline: NYT, 19 June 1988
I am not aware that the Treasury Department presented any evidence on auctions that have been successful when they are used for assets that are so heterogeneous
—William Poole, former president of the Federal Reserve Bank of St. Louis.
Even if it was adequate before, it’s not adequate now. If you delay and create uncertainty, the amount of money you have to put up goes up.
—Frederic Mishkin, former Federal Reserve governor
White House Overhauling Rescue Plan
By EDMUND L. ANDREWS and MARK LANDLER
Published: October 12, 2008
A new plan to inject capital into banks raises questions about whether officials squandered time selling an earlier bailout approach.
Intensifying solvency concerns about a number of the largest US-based and European financial institutions have pushed the global financial system to the brink of systemic meltdown.
—Dominique Strauss-Kahn, managing director, International Monetary Fund
We are looking at our entire system of guarantees and we can imagine new measures to enlarge access to our system of guarantees. We imagine being even more open in the question of what’s legitimate.
European Leaders Agree to Inject Cash Into Banks
By DAVID JOLLY and KATRIN BENNHOLD
Published: October 13, 2008
European countries, led by Germany and France, pledged to take equity stakes in distressed banks and to guarantee lending for periods up to five years.
One thing seems probable to me. The U.S. will lose its status as the superpower of the global financial system.
—Peer Steinbrück, the German finance minister.
Given the burden of debt that has accumulated, it’s hard to see the U.S. economy growing as fast as it did over the past few decades. There is a profound mood shift occurring.
—Niall Ferguson
They know its ability to turn around problems is really unmatched, historically. At the same time, they ask themselves, Will the United States get at some of the root causes that could determine its real strength over the next 10 or 20 or 30 years?
—Robert Zoellick, President of the World Bank, speaking of a prominent Chinese economist’s view on the US.
If you told me we were spending like crazy to build schools and send everyone to college, that would have infinitely different implications than borrowing like crazy to finance current consumption.
—Christina Romer, an economist at the University of California at Berkeley.
The political system does not deal well with gradual, long-term problems. It deals with crises, often imperfectly, but it does deal with them. The current experience makes the case.
—Peter Orszag, the director of the Congressional Budget Office
This morning I am casting that convention aside. I speak for all of us when I say that the Federal Reserve will continue to explore every avenue and consider every option to see the credit markets through the credit crisis…We can and we will restore order to the credit markets.
—Richard Fisher, Federal Reserve Bank of Dallas President, at an International Institute of Finance conference.
The excesses of financial entrepreneurship have been abetted by a kind of ”hollowing out” of the financial regulatory system.
…This regulatory fragmentation, and the loopholes it provides, has not been lost on Wall Street. The leading securities houses have all sought to increase their financial leverage by forming elaborate holding companies. To this end, they use creative, though permissible, accounting techniques to hide from public view their gross asset and liability structures.
…Under such a stiffened regulatory approach, Wall Street firms would probably be confronted with more stringent capital requirements and closer supervision of all the activities under their holding companies. With the loss of much of their franchise, the number and size of securities firms will eventually shrink.
In the more concentrated U.S. financial structure of tomorrow, conflicts of interest will flourish. This will invite governmental intrusion, less innovation and, ultimately, a more inefficient allocation of capital.
—Henry Kaufman: Gloom at the Stock Exchange
A Power That May Not Stay So Super
By DAVID LEONHARDT
Published: October 12, 2008
Britain overreached imperially. The U.S. has been doing it financially.
[Source for Uncited Quotes]
If you were presented today with all this data about the economy, but deprived of any knowledge of the crash, you would never be able to detect that something terrible had happened to the stock market in October.
—Robert M. Solow of the Massachusetts Institute of Technology, the 1987 Nobel laureate in Economic Science.
the Administration desired the crisis…it arises in large part from a one-time ”revolution” – slashing revenues to decimate the welfare state – which got us where we are today. But these transient events are not likely to be repeated. Not, that is, if we will just grasp what they were, and state the problem properly.
The last depression was an international phenomenon. There was a long time after the stock market event in 1929 before the economy crashed.
The fact that this has happened may help that process of international cooperation and the changes in domestic policy that are crucially needed to correct the situation.
It’s ironic that all the trumpeting now of these protections stemming from 1929 is being done by the same sources that have been trying to get rid of them and remove all inhibitions on the free markets
The Uncertain Legacy of the Crash
By LOUIS UCHITELLE
Published: April 3, 1988
LEAD: NEARLY six months after Oct. 19, it is remarkably difficult to gauge the impact of the stock market crash. The nations economy survives and grows. The terrible recession that collapsing stock prices seemed to promise has not materialized. And the riveting fears of late October have dissipated.
How Reagan Created the Crash By DANIEL PATRICK MOYNIHAN [DEMOCRAT-NY]
MEMBER OF THE SENATE FINANCE COMMITTEE.
Published: November 1, 1987
LEAD: Start with the French theologian Georges Bernanos: The worst, the most corrupting lies are problems poorly stated.
The G7 statement issued following conclusion of their gathering.
We see the need — a clear, present need — to raise capital. We’re going to do it as soon as we can do it and do it properly and do it effectively and right…Trust me, we are not wasting time; people are working around the clock to deal with this…We’ll have some volatility for a while. We need to restore confidence.
—Paulson statement
The overall goal of the program will be to contribute greater stability and liquidity in the mortgage market, which should enhance consumers’ access to mortgage financing and ultimately result in reduced mortgage interest rates
—James Lockhart on the Fannie / Freddie mandate (9 Sept)
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