Holman Jenkins’s errors, Part 2

By Felix Salmon
June 8, 2009

In the first part of his Hoover Institution essay, Holman Jenkins tries — and fails — to absolve Wall Street from blame for the financial crisis. In the second part, he places the blame elsewhere — specifically, with the government. His argument is as simple as it is bizarre:

There may not be a national housing market, and certainly there isn’t a global one. But there is a national economy, as well as a global economy, and policy structure and political culture, and a media that communicates information and analysis and fears and expectations instantly and globally. Impossible to separate, then, are the precipitous drop of confidence in asset values and a precipitous drop in confidence in government policy, on which asset values necessarily in part depend.

I’m not sure what the media are doing here — thankfully they go unmentioned for the rest of the essay. But does Jenkins really think that it’s “impossible to separate” a stock-market crash from “a precipitous drop in confidence in government policy”? I’d say it’s very easy.

For one thing, confidence in government policy never crashes as vertiginously as stock prices do. It’s true that confidence in the government changes over time. But when it falls, it normally falls because the government has done something very silly, like, say, introducing a poll tax. And even in a relatively clear-cut case like that, the government doesn’t lose popular support overnight. Indeed, the fastest rate of change of confidence in a government will generally happen upwards rather than downwards, often just after the beginning of a war.

Yes, asset values do include some component of confidence in government policy. But it’s silly to assert that therefore sudden changes in asset values are due to changes in confidence in government policy. Occam’s razor alone is sufficient to deal with this: since there’s no shortage of bubbles and crashes which have nothing to do with government policy at all, one hardly needs to resort to blaming the government to explain this particular crash. Add to that the fact that blaming the government is gloriously unfalsifiable, and you end up with a thesis which is pretty much completely substance-free.

Says Jenkins:

When one bank is seen to be in trouble, suddenly all banks are in trouble — if depositors and creditors lose confidence in government’s willingness and ability to intervene effectively.

Well, yes, if there was suddenly a loss of confidence in the FDIC’s ability to make depositors whole, that would have resulted in bank runs. Except for there wasn’t, and there weren’t any bank runs by depositors. In fact, the highly-effective government intervention of raising deposit insurance from $100,000 to $250,000 was entirely sufficient to reassure depositors that their funds were safe.

As for banks’ creditors, they never had a promise from the government that they would be paid in full — which is precisely why they got significantly higher yields on their bank debt than they could get on Treasury bonds. They couldn’t lose confidence in the government guarantee of bank debt because there was no such guarantee to begin with.

Jenkins, by contrast, sees things very differently. The minute anybody says the word “Depression”, it seems, any fall in the stock market can only be blamed on the government:

The moment the media and politicians began touting the risk of a “Second Great Depression,” firms and investors around the world began treating it as a real risk. Firms and investors, for the most part, are sophisticated enough to recall that the Great Depression of the 1930s was first and foremost a product of disastrous policy choices made by governments amid what might otherwise have been a normal correction in boomtime asset prices…

At least since banker J.P. Morgan personally intervened in the 1907 Panic — only one party is responsible for systemic confidence anymore. That’s government. When systemic trust falters, all eyes turn in a single direction. Government necessarily becomes the only truly relevant actor, with all the perils and politicization that that portends.

I’m not going to get into the debate over the causes of the Great Depression. But basically Jenkins’s argument is simple:

  1. Simply talking about a Depression concentrates the collective mind on systemic risks.
  2. After people started talking about a Depression, asset prices fell.
  3. Therefore, asset prices fell as a result of worries about systemic risk.
  4. Only the government is responsible for systemic confidence.
  5. Therefore, asset prices fell as a result of government actions.

Reduced to its bare bones like this, there seems to be precious little meat on this argument. But maybe, somewhere in his 4,800-word essay, Jenkins might care to identify which government actions were responsible for the crash in asset prices? He does, briefly, here:

Government was the only party in a position to protect systemic confidence, but instead sent mixed signals — saving Bear Stearns, telling the world that there would be no disorderly failures of important financial institutions through bankruptcy; then letting Lehman fail through bankruptcy. It stepped up to save AIG and pumped in improbable amounts of taxpayer cash — when it might just have nationalized the firm, declaring its debts sovereign debts, which would have stopped the collateral calls related to its subprime guarantees. How many more times could government possibly repeat the AIG fiasco if other large firms needed rescuing? It was a rescue, but a far from credible one.

It didn’t help that the crisis came in the middle of a presidential election, creating even more uncertainty about the future of policy. So the sinews of trust unraveled with unholy speed.

Do sinews really unravel? Never mind that. Jenkins points to three things which might have caused this devastating and precipitous drop in confidence in the government. One is saving Bear Stearns then letting Lehman fail; the second is rescuing AIG in a possibly-less-than-optimal manner; and the third is the presidential election.

The third is obviously silly: if investors “are sophisticated enough to recall” the causes of the Great Depression, one must assume that they’re sophisticated enough to know when the next presidential election is scheduled to take place. The rescue of Bear and of AIG can’t have caused a breakdown in trust in the government’s ability to prevent systemic meltdown, since even if they weren’t elegant, they did what they were designed to do, which was to prevent the collapse of the companies in question. So that really leaves just Lehman. But no, says Jenkins, it’s not really Lehman:

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.

This seems to assume that investors pre-crisis did have certainty about what the government might do in a crisis. I just don’t buy it. Does Jenkins have any empirical or anecdotal evidence that there was “a sudden, sharp explosion of uncertainty about what government might do” right around the time of the stock-market crash, and that said explosion of uncertainty was the proximate cause of the crash? Of course not, because the range of possible government responses to the crash was never particularly great. For all his overblown rhetoric, Jenkins fails to identify a single government decision as being particularly contrary to what market participants generally expected the US government to do in times of crisis. Looking back today, the closest that we came to that happening was when the House Republicans briefly derailed the bailout act at the end of September — but it didn’t take long for them to get back in line.

Jenkins ends with a series of standard-issue right talking points. Government interference in private industry is a Bad Thing, he says, and we’re doomed to suffer the consequences of “endless acts of industrial favoritism from Obamanomics”. But seeing as how he can’t even seem to get the past right, I can’t really take seriously his predictions about the future.


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Now that the financial industry has been saved by socialism, the “free market” types like Holman Jenkins can resume their role of pulling the wool over the eyes of the masses. Bailouts for me, creative destruction for you…

Posted by Max | Report as abusive

Jenkins seems dismissive of the housing bubble as the main culprit. He can say that “Most of America wasn’t in a housing bubble”, but CA, FL, AZ, and NV definitely were and they are 20% of the total housing stock. You can still look at foreclosure statistics and those 4 states are hugely above average.

The biggest question I would ask is why was the bubble geographically limited if it was mainly the result of the Federal Reserve keeping rates low? It might be because those were the states with the biggest amount of new construction, but an analysis of that would be more interesting than this ‘review’

Posted by winstongator | Report as abusive

I always read Jenkins’ op-ed pieces in the WSJ, if only to reassure myself of my own common sense relative to his. I like to read things that challenge my viewpoint and perspective, but reading Jenkins’ arguments is so disorienting, I’d swear he comes from another planet entirely.

Jenkins actually has the issue of uncertainty the wrong way round. Pre-Lehman there was uncertainty about how and to what extent failing institutions would be supported. Post-Lehman the was no-uncertainty, they would be allowed to fail. The fact that this was the wrong decision is evidenced by the market reaction to it. It is this narrowing of the possible range of outcomes from a field encompassing full sovereign support for failing institutions (no one loses money worst case is moral hazard) at one extreme to only depositors get rescued (all investors lose their money) at the other that forced the market to price in what it viewed as the worst outcome.

Posted by Ben | Report as abusive

I am shocked -SHOCKED!- that Mr. Jenkins doesn’t allow comments on his article.

Holy God, what a mix of self-righteous right-wing bombastic judgementalism and spin.

Unforeseeable consequences, my left elbow.

Posted by Unsympathetic | Report as abusive

There is plenty of blame to go around for this financial crisis, including the government, but to even attempt to absolve the financial services industry from blame is simply absurd. Thankfully, many of us in the financial services industry recognize the mistakes and are taking corrective action, but much more needs to be done. Let us hope that all responsible parties, including the government, face up to their mistakes and act accordingly.

Coming from someone who generally likes to criticize whenever possible and who has not always agreed with what you have to say, all I can say on this one is “nice work.”

Posted by Mark | Report as abusive