Friday, June 05, 2009

Holman Jenkins has a thoughtful piece on Wall Street and Washington

here (via Eddy Elfenbein). It touches on a few things I find of great importance:

1) Greedy Wall Street executives got killed, too:

Nor is it true that Wall Street executives and CEOs had insufficient “skin in the game,” so that “perverse” compensation incentives created the mess. That story also does not pan out. Individuals, it’s true, were paid sizeable bonuses in the years in which the securities were created and sold. But most also had considerable wealth in the form of stock and stock options in their firms, which bet their own capital on these securities. Many also appear to have invested directly in funds to hold the subprime securities. They had skin in the game. Personal losses to top executives in banks that failed or whose share prices collapsed were in the millions, hundreds of millions, and in some cases billions of dollars.

2) Not even the smartest people saw this crisis coming
But those who bet successfully against subprime did so through elaborate, expensive, negotiated deals to purchase credit default swaps or buy “put contracts” on subprime indexes. Had they really seen what was coming, they would saved themselves a great deal of expense and bother by simply shorting Citigroup, Bank of America, Lehman, Bear Stearns, etc. Their profits would have been huger, their workload and hassle factor much less. The reason they didn’t, it’s reasonable to suppose, is because no more than anyone else did they foresee the catastrophic consequences we now suppose were destined to flow from excessive issuance of subprime mortgages.

3) John Taylor is one of the brightest, maybe the only guy I'd rather have as Fed chair over Bernanke

John Taylor, a Stanford and Hoover Institution economist, has emerged as one of the analytical poles in the post-crisis diagnostic debate. He focuses on the Federal Reserve as the initial cause of the housing bubble, for keeping interest rates low and policy loose too long after the 2001 recession. If the Fed had behaved differently, everything else might have been different. But the Fed’s leaders had good, conscientious reasons for the decisions, and errors, they made. In any case, there is little hope they won’t make errors in the future. What is most striking about Taylor’s analysis, though, is the extent to which he shows that investors in the global panic were responding not to the exposure of subprime losses, or even the failure of Lehman Brothers, but to what we might call a sudden, sharp explosion of uncertainty about what government might do and what principles or expectations might guide its actions amid the crisis.

4) Unintended consequences portend of huge risks
In sum, the global financial panic sparked by the behavior of subprime mortgage loans is probably best understood as an unforecastable accident of history. Another accident, brought on by the first, is the empowering of the Obama agenda, born in the inexperienced mind of a Chicago academic and state legislator. It is likely to end badly, as such dirigiste overreaching always does.

UPDATE: Felix Salmon takes umbrage, and lands some legitimate hits. But I apply his reasoning to General Motors, and find some correlation to Wall St:
I would say that GM made cars with the intention of dumping them. And GM was working off of models that gasoline prices and household discretionary purchasing power would not be the risks they turned out to be. And why did GM pay junior high school dropouts $35 per hour for 20 years, and then another $30 per hour in pension and medical benefits in retirement with life expectancies on the rise?

The fact is that GM was out of control. And excesses in GM did lead to the employment crisis of the auto industry in the midwest and beyond. The media’s uneven handling of one industry vs. another simply doesn’t hold water.

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