September 19, 2008 / New York TIMES High & Low Finance Reckless? You're in Luck By FLOYD NORRIS
Allow me to propose a simple principle that the next president and Congress could follow as they devise a new financial regulatory regime to replace the one that failed so badly: If an activity is important enough to justify a government nationalization to prevent a default, it is important enough to be regulated. The regulators need to know what risks are being taken, and by which institutions, in time to act before a crisis develops. Had the government bothered to do that in years past, it might not have faced the decisions it faced this week. First, it let one big firm go down, and then it became scared enough to nationalize another one to keep it afloat. Now, showing no sign of embarrassment over how badly they failed before, the current crop of regulators seem to be unified in their determination not to let the markets force them to make a similar choice on some other big financial institution. The result is a campaign against those who bet that the financial system was crumbling. If the government is forced to decide whether to save another firm, it will face the same question it faced with A.I.G. and Lehman Brothers. Would this failure cause systemic damage to the financial system? Lehman did not measure up because its chief executive, Richard S. Fuld Jr., simply was not reckless enough as he ran Lehman into the ground. Had he had the foresight to make a lot more bad bets in the derivatives market, the government would have feared financial chaos and might have nationalized Lehman, just as it nationalized A.I.G., Fannie Mae and Freddie Mac. Or it would have subsidized a takeover, as it did for Bear Stearns. The Paulson-Bernanke Doctrine is not "too big to fail." It is "too reckless to fail." If you get your company into enough trouble to threaten the financial system, Ben Bernanke, the Federal Reserve chairman, and Henry Paulson, the Treasury secretary, won't let you collapse. It may be that they miscalculated. Lehman's default caused a money market fund to suffer losses, and scared investors into pulling their money from similar funds. If those funds cannot find buyers for their assets, there could be more defaults, and perhaps more failures. The Paulson-Bernanke Doctrine was born not of theory or ideology, but instead from improvising as each new crisis erupted. The Fed's briefing on the nationalization of A.I.G. did not start until 9:15 p.m. on Tuesday night, which is not a sign of carefully thought-out decisions. When they met with Congressional leaders Thursday night to seek a plan to get cash to banks before they fail, it was almost as late. If these nationalizations smack of socialism, it is closer to the Marxism of Groucho than of Karl. more at: http://www.nytimes.com/2008/09/19/business/19norris.html -- Jim Devine / "Nobody told me there'd be days like these / Strange days indeed -- most peculiar, mama." -- JL. _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
