Have we wasted our crisis?

By Felix Salmon
July 28, 2009
comment, we've wasted our crisis. Not that I want another one, of course -- although I fear that given the amount of complacency in the markets right now, the chances of a second big shoe dropping continue to rise alarmingly. But asset markets have a way of setting the mood of policymakers, and right now that mood is that things ain't broken any more. As a result, they are pretty unlikely to get fixed.

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The bond market is on fire right now: Treasury is selling $115 billion of notes this week, with the 10-year bond yielding a whopping 5.1 percentage points more than the inflation rate — the widest spread since 1994. Meanwhile, total corporate bond issuance in the first half of 2009 was an all-time high of $1.791 trillion — more than anything we saw during the boom. This is what it looks like when markets clear: bond investors are seeing attractive yields, bond issuers are seeing abundant liquidity, and there’s an enormous amount of pent-up demand for financing from the long wintry months when no deals could get done at all.

Meanwhile, the S&P 500 is closing in on the 1,000 mark, after having dropped below 700 in March. The primary market in stocks is already heating up again in places like China and Brazil, and assuming that stocks manage to stay at their current levels or higher will surely reopen in the US as well in 2010. Are we really back to normal already, as far as the markets are concerned?

I fear the answer might be yes. Or, rather, I fear that the relatively happy state of the stock and bond markets has removed a necessary degree of urgency from the regulatory-reform debate, which vastly increases the chances that changes will be small and ineffective. I also worry about all this new debt: the deleveraging trend seems to be unwinding itself, and the chances of moving to a more sensible and less leveraged world of more equity and less debt are diminishing by the day.

Pace Rahm Emanuel’s famous comment, we’ve wasted our crisis. Not that I want another one, of course — although I fear that given the amount of complacency in the markets right now, the chances of a second big shoe dropping continue to rise alarmingly. But asset markets have a way of setting the mood of policymakers, and right now that mood is that things ain’t broken any more. As a result, they are pretty unlikely to get fixed.


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Still 5,000 points below the market high for the DOW in Sep-Oct 2007. Naturally, the run up from the 6k level is encouraging…it beats the slow death of watching Sep – Dec of last year.

I don’t care how steep the yield curve may be, most large banks are still moderately broken & need earnings to replace lost capital. And then there’s Citigroup, which is just dysfunctional. Until healthy lending returns without any assist from Uncle Ben or Tim G, count me a skeptic.

Posted by Griff | Report as abusive

The Fed seems to have restored its long standing transmission mechanism of monetary policy , asset price inflation!

So end of crisis and back to the old greedy mood.

HMOs are flying since Obama failed to pass the healthcare reform bill before the break!!

Posted by Fred Engels | Report as abusive

Interesting question because the opposition will argue that nothing dramatic need be done though the economy is in the tank and investors in longer-term dollar assets are taking big risks chasing yields when the dollar’s value over time has become shall we say questionable.

Posted by jonathan | Report as abusive

Have no fear, Felix – with this “solution” in place, the next crisis is not far away, so we’ll get another crack at it.

And perhaps that’s for the best – those who argue that nothing dramatic need be done probably need to be walloped before they see the light; clearly they didn’t really feel the impacts of this crisis (or the dot-com bust, or LTCI, etc.).

Posted by Eric Dewey | Report as abusive

To the extent that people haven’t used Irving Fisher to understand this crisis and its cure, it doesn’t bode well for the future. The Chicago Plan of 1933 also provided a blueprint for dealing with this crisis and inhibiting the possibility of another.What’s needed is the study of thinkers who can get at the root of the problem, like the people involved in the Chicago Plan.

The hope for better regulations and regulators is simply unjustified. I’m all for trying it, if nothing else is possible, but it’s a recipe for further crises. What’s needed are structural reforms like Narrow Banking, Stamping, and a Guaranteed Income, which will be a better Automatic Stabilizer should these problems reoccur. The Health Plan, although I’ll back the Democratic Plan, is also more business as usual. Namely, fiddling around with the issue and not getting at the root cause or problem.

We have an interest driven welfare state. I didn’t expect that to change, but it’s rapidly getting harder to see any change. In a few years, these problems will seem like myths again, only to become reality when we’ve forgotten that we didn’t really change anything. The S & L Crisis should have better prepared me for this disappointing result. However, many of the ideas being put forward in the Geithner Plan are worth trying, if, again, that’s all we can get.

The article: Ben \”Systemic Risk\” Bernanke proves that Bernanke knowingly maintained a strict monetary policy long after he knew of the sub prime problem as he knew it would cause of the \”Depression\”.

It shows that he probably engineered it on purpose!

If you want to sleep tonight, Don\’t Read It!

\”In contradiction to the prevalent view of the time, that money and monetary policy played at most a purely passive role in the Depression, Friedman and Schwartz argued that \”the [economic] contraction is in fact a tragic testimonial to the importance of monetary forces\” (Friedman and Schwartz, 1963, p. 300).

The slowdown in economic activity, together with high interest rates, was in all likelihood the most important source of the stock market crash that followed in October.

In other words, the market crash, rather than being the cause of the Depression, as popular legend has it, was in fact largely the result of an economic slowdown and the inappropriate monetary policies that preceded it.

Of course, the stock market crash only worsened the economic situation, hurting consumer and business confidence and contributing to a still deeper downturn in 1930.\”

Governor Ben S. Bernanke
Money, Gold, and the Great Depression.
At the H. Parker Willis Lecture in Economic Policy, Washington and Lee University,
Lexington, Virginia.
March 2nd, 2004

You can read also: Preparing for the Crash, The Age of Turbulence Update: 27/07/09., which tries to accomplish Greenspan Mission Impossible:

\”That is mission impossible. Indeed, the international financial community has made numerous efforts in recent years to establish such oversight, but none prevented or ameliorated the crisis that began last summer.

Much as we might wish otherwise, policy makers cannot reliably anticipate financial or economic shocks or the consequences of economic imbalances.

Financial crises are characterised by discontinuous breaks in market pricing the timing of which by definition must be unanticipated – if people see them coming, then the markets arbitrage them away.

The clear evidence of underpricing of risk did not prod private sector risk management to tighten the reins.

In retrospect, it appears that the most market-savvy managers, although conscious that they were taking extraordinary risks, succumbed to the concern that unless they continued to \”get up and dance\”, as ex-Citigroup CEO Chuck Prince memorably put it, they would irretrievably lose market share.

Instead, they gambled that they could keep adding to their risky positions and still sell them out before the deluge. Most were wrong.\”

Alan Greenspan
The Age of Turbulence: Adventures in a New World [Economic Order?].

The Age of Turbulence: Plea for a New World Economic Order. explains the nature and causes of economic depressions and proposes a plausible alternative solution.

I have more questions than answers.

I hear of markets increasing, but companies are still laying off. Why the mismatch?

Is this because all of the companies on the stock market are international? So is this really an indicator of how well other contries are doing at our expense?

Does this mean that companies are profitting at the expense of the people within the U.S.?

Our GDP must be much higher to really create a solid foundation. Otherwise, we are just rebuilding a house of cards which will fall EASILY again…

Posted by Jeff | Report as abusive


I’m no expert either, but here’s a few thoughts:

Remember that he stock market is basically gamble on the future more than reflection of the present. The reason the market’s up (as much as anyone knows) is more that the investors think that things will be better in the near future than that things are good now.

And no, most of the world is worse off than us currently, although China continues to apparently roll on (due mostly to their stimulus package and internal consumption). For various reasons (some perhaps right, some perhaps wrong) people are guessing that we’ll right ourselves before most of the rest of the world.

Even more than higher GDP, we need ‘real’ GDP, not based on risky financial transactions (most of the GDP gains of the Bush years were in the financial world – and have of course since evaporated). But alas, Goldman Sachs is once again weaving their magic and we look to be headed right back down the same road. Gulp

Posted by Bruce Steinback | Report as abusive