In Bailout Nation, econoblogger and analyst Barry Ritholtz asks how America turned into a country where those who don’t manage risk properly are bailed out from the consequences of their own decisions and stupidity. Clocking in at 300 pages, the answer isn’t short, but Ritholtz’s combination of wit and clarity makes the book an enjoyable read. I’ve gone through a number of books on the crisis, and this one is the clearest and easiest to understand, yet it remains accurate. Ritholtz keeps it simple, but he doesn’t oversimplify.
I’ve been following this crisis for, well, long before it existed, at least as far back as 2002 (when it became clear Greenspan’s policies would lead to a housing bubble). I’d say I know a fair bit about how the crisis came to be, but Bailout Nation had a number of insights and many facts I wasn’t aware of.
Perhaps the best thing about Ritholtz’s narrative is that Barry puts current events in context. Not only does the book have a brief history of the central banks in America, it runs through the New Deal, the post war period and deals with past bailouts. Ritholtz notes that the era of bailouts actually started in 1971…
The rescue of Lockheed in 1971 ($250 million) led to loan guarantees for Penn Central in 1974 ($676.3 million in loan guarantees), which paved the way for the $1.5 billion rescue of Chrysler in 1980 and then Continental Illinois Bank in 1984 ($1.8 billion loss). This led to the original mother of all government insurance payouts—the savings and loan (S&L) crisis of the early 1990s (total taxpayer cost: $178.56 billion), which led to the stock market rescue of 2000, and so on.
Now that may strike some as a big claim. That’s where Ritholtz’s review of the New Deal comes in. Because here’s the odd thing—the New Deal didn’t include bailouts. Yes, the New Deal helped people who needed it, and even helped corporations; but it did not seek to bail out specific corporations from their own failures.
Traditional American style intervention in the economy wasn’t about bailing out failures…
Instead the government would give new industries a great deal of help (for example, huge amounts of land to railways) and then let them fight it out. During the "hockey stick" phase of a new technology many firms arise, and compete. They create too much capacity, and eventually there is a shaking out. During that shaking out, when prices collapse, most firms fail, and only a few survive. The government did not bail out the losers.
Most recently you can see this in action in the dot-com boom, bubble and bust. Most dot-coms didn’t make it, and that’s the way it should be.
And in bad times, when the government helped, it was to help those who were effected by problems, like the Great Depression, not of their own making.
But since 1971, and more specifically since the ascension of Alan Greenspan to the chairmanship of the Fed, that changed. The Wall Street term was "the Greenspan Put". As Ritholtz explains, a put is the option to sell a stock at a specific price. No matter how low the stock price goes, you can always sell for the strike price of the put. And for the better part of two decades, every time the markets seemed to be in danger of declining, Uncle Alan Greenspan, would step in and provide easy money to try and stop it from doing so. More than that, he provided easy money to create bubbles – the stock market bubble in the 90s, then the housing bubble in the 00’s.
Add to Alan’s easy money a refusal to engage in regulation of markets, a belief that the government would always step in to fix market failures when things went wrong (as with Long Term Capital in the 90’s), compensation practices which encouraged a short term profit motive (so executives could cash in their stock options) and much more which I lack the space to go into (but which Ritholtz deals with in style in the book) and you came to the current crisis, where 15 trillion has been committed by the Federal government to make good the losses of private financial actors.
How, exactly, the US went from a nation which believed that companies, including their stockholders and bondholders, which failed, should suffer the consequences, to a Bailout Nation is thus the central question of the book.
But it’s not the only question. Perhaps the more important question is "what are the consequences of constantly bailing out private companies which are responsible for their own losses?"
The answer, according to Ritholtz, is that each bailout sets up the next.
The reason is moral hazard. If you know that if you fail, you’ll be bailed out, you take more risk. Heads you win, tails the taxpayers lose. The executives who oversaw the creation of the current crisis, after all, are still very very rich. They did fine. And the bondholders who loaned them the money have mostly gotten by. Certainly there have been some losses for private investors, but compared to what they would have been without bailouts they aren’t that significant. Especially if you made your millions in the good times.
Which leads to something Barry doesn’t say in the book, but which follows logically from his argument. If bailouts lead to more bailouts, well, this isn’t the last bailout. There’ll be another crisis, and it will be even bigger. (I’ll be curious to see if Barry agrees with this.)
None of this does real justice to Barry’s book. There are sections on the legislative changes that allowed this to happen. There is a discussion of the role of the SEC and other regulators. There are concrete suggestions for how to deal with the crisis without creating so much moral hazard. Perhaps most importantly there is a discussion of the fallacy of self-regulating markets, epitomized by this quote:
The misguided deification of markets is the primary factor that led us to being a Bailout Nation. Markets can and do get it wrong—not by just a little, either; occasionally they can be wildly wrong.
At the end of the day, if you’re going to have radically deregulated markets then you have to allow actors to take their losses. As Ritholtz points out, the way markets self-regulate, to the extent they do, is for firms which don’t manage risk to go out of business and for people who gave those people money to lose that money. The lesson taught by markets is that stupid money is dead money.
Unregulated markets where you don’t allow companies and individuals to be destroyed by the losses they have desperately earned have neither the virtues of markets nor of regulation.
If you’re looking for one book which explains what went wrong, I haven’t read a better one than Bailout Nation. It’s an easy, colloquial read, simple to understand, and yet doesn’t oversimplify.
Please welcome Barry Ritholtz to Firedoglake. As usual with book salons please take off topic conversations to the prior thread.
Related posts:
- FDL Book Salon Welcomes Jonathan Tasini, “The Audacity of Greed: Free Markets, Corporate Thieves and the Looting of America”
- FDL Book Salon Welcomes George Soros, The Crash of 2008 and What It Means
- FDL Book Salon Welcomes Bruce Bartlett, The New American Economy: The Failure of Reaganomics and a New Way Forward
- FDL Book Salon Welcomes Senator Byron Dorgan, Reckless!: How Debt, Deregulation and Black Money Nearly Bankrupted America
- FDL Book Salon Welcomes Maggie Mahar, Money-Driven Medicine: The Real Reason Health Care Costs So Much
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Barry, let me ask the first question. Do you think that the way we have dealt with the crisis, through bailouts, means that we can expect, probably after this next economic cycle, another and even bigger crisis?
And what is your opinion of the regulatory reform efforts the Obama administration has been floating. How well do you think they’ll work if they pass, and why or why not?
Barry, Welcome to the Lake.
Ian, Thank you very much for Hosting today’s Book Salon.
Welcome to Firedoglake – so glad you could join us!
When we resolve the crisis by merely throwing lots and lots of money at the very same people who cause a crisis, what you think the likely future results of that will be? The whole concept of moral hazard is that when we insure people against their own irresponsible actions you encourage more of those actions.
All of this is a long way to go to say yes the results of bailing out poorly run companies with terrible risk management — companies that essentially blew themselves up — is to create more of the same.
As to your 2nd part . . .
Barry, welcome to FDL this afternoon.
I have not had an opportunity to read your book so please forgive me if you cover this, but have you seen any evidence of possible shame or embarrassment from these companies (and executives) that are bailed out or do they all just continue to act as if this is their due just because of who they are?
Hi Ian, Hi Barry, welcome to the Lake.
Is there any chance we’ll get regulation back into the market?
As a technical note, there is a “Reply” button in the lower right hand of each comment. If you are responding to a specific comment, just click the “reply” and it will pre-fill with the comment number and name of the person whose question you are answering.
My big complaint with the Obama team is that they did not make a clean break with W.’s administration. I’ve been calling this Bush’s third economic term because for the most part, team old bomb has been following the same playbook that Hank Paulson and George W. Bush were using. This is hardly, “Change we can believe in.”
It was a small badge of honor when salon named one of the 14 most strident critics of the Obama economic policies — along with Paul Krugman Ron Paul, and Jim Rogers. Good company.
http://www.salon.com/news/feat…..index.html
Thanks for having me
Thanks for being here Barry, and I’m really happy that the book made it into the light of day. Can you talk about its publication history a bit?
Also sorry that I missed your Big Picture conference recently. I heard it was great.
Do you feel that limits on executive compensation are for real, or for show? Will they have any impact?
PS the world would be a better place if Charlie Gasparino sought medication.
http://www.ritholtz.com/blog/2…..sparino-me
It is very likely that we’ll never see at lease some form of regulation returned to the market. The key question is, will the banking industry and Wall Street lobby their way to the point where subsequent regulation is so watered down as to be near meaningless.
So far, that appears to be more likely than I am comfortable with.
The biggest disappointment is the lack of outrage from the public — It’s the only reason why these shameless lobbying attempts by Wall Street are even remotely successful — there is no penalty to elected officials for giving corporate executives what they want. At least that’s how it appears to be so far.
Barry — thanks so much for all of your digging on this book. Several of the expose portions are a brilliant recitation of facts and actions, and it ought to be “must read” material for any of the folks on The Hill who are actually serious about real reform versus public relations kabuki and status quo. Sadly I think there are far more of the latter than the former, but one can dream.
And Ian, thanks for such a great intro and for hosting today.
A quick question, Barry: do you think we will see any re-institution of the divisions that were initially put together in Glass-Steagall or is the intertia for real reform just too strong with so much Wall Street cash pouring into Congressional coffers?
Welcome to FDL – congratulations on your new book
Yes, the conference was pretty fabulous — really, really good people, expert in their fields, fantastic communicators, and consistent moneymakers for their clients.
Oh and one little secret to a good conference: NO POWERPOINT ALLOWED
Its a Trickle Down Bailout? Its Socialism for the rich that the rest of us pay for? Helicopter Ben did learn from Herbert Hoover’s mistakes during the Great Depression and this Conservative bailout puts helping the rich above government should leave the free market alone as a Conservative Priority.
Our wealth goes to bail them out and we can’t even get National Healthcare as a trade.
That said my questions are is this plan working? How does the future look?
I do not want another decade of the middle class falling behind as happened under Reagan but that is where I think we are headed.
The big problem with executive compensation is that it’s a symptom of the underlying problem it’s not actually what’s wrong with the system — the systemic problem is that the cronies that sit on each other’s boards of directors (golf buddies etc.) are not doing their job, namely representing the shareholders interests.
The fascinating thing about corporate America is that in theory it’s a democracy. the board members are supposed to represent the interests of their constituents i.e. the shareholders who elected them. But what happens in reality they’re usually hand appointed hand selected by the chairman of the CEO and each scratch each other’s back and you end up with the owners of the company getting screwed by the people who were there to this theoretically represent their interests.
If you fix this corporate governance issue, if you get rid of the crony capitalism, if you get a fair and reasonable job managing the Corporation on behalf of its owner’s, the compensation issue goes away.
And let me add: I have no problem with the Steve Jobs or John Chambers or Larry Ellisons of the world making billions of dollars that companies are consistent money makers for their shareholders and employees; it’s the payment of hundreds of millions of dollars to these inept clowns who destroy companies that’s beyond outrageous.
As I was going through the book, I cut out particularly pithy quotes. This one, about Greenspan, seems to speak to the mistake that all of Greenspan, Paulson, Obama, Bernanke and Geithner make – managing the markets rather than the economy:
The irony, of course, is that in managing markets, Greenspan built himself up for future falls. Of course, one might argue that with his money for green energy, his stimulus money, his plans to change health care, and his proposed regulatory changes Obama is paying some attention to the economy.
What parts of Obama’s policies, if any, do you think are most helpful? How much effect do you think they will have?
Also, as Ian points out above, the New Deal was not a series of gimmes, but a means with which the government could give Americans — including corporations — a hand, but not a hand-out. They were expected to do the work to help themselves (the CCC is a fine example of that philosophy, I think, as well as the Arts programs and the railroad land grant without strings so that real competition had to occur and those who did the work flourished as a result).
It seems to me that the most ardent “capitalists” these days who have been pushing for so many of these bailouts have no real sense of what capitalism has meant in this country for decades. And those who most vilify FDR and his cadre of bright young men and women have no clue what any of them stood for at a gut level, and why they worked so hard to fashion not just programs, but ones with strong oversight to prevent the very pillage, plunder and run policies we’ve seen.
FDR learned a great deal from the lessons learned by Teddy Roosevelt, it seems to me, with the trust busting and having to deal with robber barons. And he put those lessons to work for the good of the whole nation, not just his peers among the privileged few.
Do we have politicians and leaders who are willing to do that today? And if so, who — because I despair most days that those folks truly exist any longer the way that campaigns are financed and ears are bent inside the Beltway.
Which new industries would you help out today and how? Is the cash for Clunkers idea a good idea?
I actually like Charlie. He was a great investigative journalist.
I am less enthralled with him as a pundit and TV talking head — too politically extreme, way too close to corporate management to IE Lehman Brothers Dick Fuld.
But back in the day, he was damn good.
One of the things I really like about the financial blogosphere is that they are — and I’m going to struggle with the right words for this — issue driven, and therefore aren’t locked in a zero sum battle for political ascendency.
Meaning, they manage to hold the same yardstick up to everyone, and aren’t playing for party advantage. The liberal blogosphere has largely defined itself as locked in a steel-cage death match with the GOP, which has value, but that means they’re reticent about applying the yardstick they use for Republicans to their own, lest they cede some territory.
There’s value too in making sure that the house stays clean no matter who’s in charge. Those two things shouldn’t be antithetical, but sadly they often seem to be.
I don’t think would I get the sort of sweeping intelligent well thought out regulation and crisis of this magnitude deserves.
Did the supposed reforms after Enron blew up make any difference in the governance aspects or were they only superficial changes that allowed the “you scratch my back, I’ll scratch yours” deals to continue?
Well, what an opportune time I picked to come in to load another audiobook disc on my ipod.
I haven’t read the book, but am pretty familiar with the crisis.
I’ll join the discussion by saying that I am trying to read Greenspan’s memoir. Have you read it, Mr. Ritholtz? If so, what did you think?
Poisoining the water, I’ll reveal that I think it is pretty sophomoric. His understanding of the economy is paper thin, mostly sloganeering. He obviously does not understand markets because he never discusses the characterisitcs of markets and whether their structure in any way resembles the atomistic nature that Adam Smith, and microeconomics textbooks, say are self-regulating. Greenspan never discusses market imperfections.
And it’s not as though no one tried to tell him. He was on my mailing list when I worked on Wall St., and I wrote a lot about how the structure of some markets, like the medical industry, influenced not only the kind of care that the industry offered, but also, because of high medical inflation, was also a macroeconomic problem. I know Greenspan read my material because he once mailed one back with a handwritten technical correction. But I guess he is so wedded to his ways that looking at the problem from a different point of view must have seemed like Greek to him. (BTW, his version of the problem of medical inflation, in his memoir, is not consistent with the evidence, no surprise there.)
So that he contributed to cementing the behavior of economic policymakers into a wrong headed path is also no surprise.
I will read your book, Mr. Ritholtz. I get asked what books to read by noneconomists who want to become better informed on the current situation, and I have to tell them I don’t know because I haven’t read any books, just the news. Sounds like your book will be just the one to recommend.
I’m actually a CNBC addict from way back. And I remember that when Gasparino was explaining the PPIP, he said that the banks weren’t going to play unless it was a huge giveaway, and if that was the case, why couldn’t ordinary people play too?
He actually has a sense of fair play that he brings to his reporting. But he’s an emotional 2 year old. (Didn’t he go after Yves Smith?)
The United States of Goldman Sachs was, I’m sure, planned in their executive suite. They decided who among their ranks was gonna be Treas. Sec. under the Ds and who under the Rs.
As an attorney who studied quite a bit of business law and corporate governance obligations in law school and practiced a bit of it for clients back in the day, I have to say that it has surprised me how few shareholder suits we’ve seen in the wake of some of this catastrophic management failure. There are still fiduciary obligations to the shareholders regarding oversight and other issues that go above and beyond the commitment to maximizing the almighty worship of profit.
It seems we have traded what once was a long-term value mindset for a short-term “cronies and cash” mentality that serves no one but those on the inside. Which, last I checked, raised self-dealing questions out the wazoo, which ought to be asked on a number of fronts — included with elected officials.
Barry’s book is great. Especially if you’re struggling to understand what’s going on — as Ian says, highly readable and makes complex things understandable.
https://www.amazon.com/dp/0470520388?tag=firedoglake-20&camp=0&creative=0&linkCode=as1&creativeASIN=0470520388&adid=1QSMDAQ4PCMXXWAC4ZCD&
What do you think of Reverse Social Darwinism as an explanation?
Those at the top the Elite devolve because the weak at the top are never allowed to fail or stop breeding and the strong are never allowed to rise and strengthen the genes of those at the top.
The John Kerry Good elite types go to war, lead and sometimes die. The small school bus special ones like Bush never risk their lives all stay at home and breed causing the Elite to sink.
The want to be John Gaults make nothing invent nothing sit on their wealth protected in family trusts or they gamble in ponzai schemes or bussines ventures like Bush’s long stream of failed business.
I think every Empire reaches a point where finance/gambaling becomes more important than manufacturing and then fails.
Energy is where I would push hard. Refit every building in America to produce energy, refit the energy web with smart meters and so on. I would do so by making the money available for folks who want to do it, and let them fight it out to see who can do it best.
A lot of what I would do would deal with old industries. Break up the media conglomerates, break up the high-speed internet oligopoly and change the rules about who can sell time on their networks, allow municipalites to set up their own wireless networks, and so on. Move to a modified single payor health regime (which would boost innovation and new business creation massively, by freeing people from the chains of their company health care plans and by reducing business costs). A lot of the problems in the US are caused by very inefficient, non productive rent-seeking oligopolies. As a result the US is falling behind in technological area after technological area.
I don’t think we’ve really seen any “Obama’s policies” yet. what I mean by that is, he stepped into the White House with the landscape on fire. What we’ve been seeing all our attempts to put the fire out, rather than proactive forward-looking policies.
The reversing of Bush is stem cell research policies is obviously a positive. Unfortunately for us, the rest of the world started down the path of stem cell research eight years ago and is now far far ahead of the United States in terms of both economic benefits and medical research. I am obviously in favor of anything that could help cure Alzheimer’s, Parkinson’s, diabetes, etc.
I think there is some hope also for pouring research money into so-called clean energy and green jobs. For all the talk of the free market, people seem to forget that the government has been an enormous sponsor of fundamental research that created it tremendous amounts of economic activity and jobs. What the government does really well is basic physics things that are associated with NASA things and associate it with the Department of Defense if you look at how many new inventions came out of the moon program — things like microwave ovens and semiconductors even the Internet was originally a defense department projetc (DARPA net).
I would love to see an enormous return to fundamental physics research, something that was lost during the past eight years. We need a Manhattan projects for batteries, solar, hybrid technology, clean coal — for the past 20 years we’ve only seen incremental gains in these technologies. I’d like to see order of magnitude increases in the efficiency of solar panels, the ability for batteries to store and whole charges. we won’t get that without a major fundamental breakthrough.
No, just more of the same
I’ll second that and then some — as a non-economist who wasn’t following a lot of this as closely as folks like Ian have been for the last few years, it was eye-popping. And I really appreciate how compulsively readable it was for a lay person with only a small grounding in a lot of the intricacies involved.
Highly recommended read, and one I’ll be picking up again as I digest some of the bits. I don’t say that very often given the time constraints I have, but this one is definitely one I’ll read a second time and turn to as events unfold as well.
It’s so funny you say that. During Bush’s terms — I’ve only been blogging for about six years so except for the past four months it’s been all W. all the time — I use it constantly get this sort of troll critique “Oh, you’re just a Bush hater.”
When I started criticizing the Obama policies, I got one or two of the “you are just an Obama hater” but it was laughable..
The bottom line is good policy crosses political lines and both sides of the aisle have bad policy on the regular basis.
No, I did not read his memoir, and to be blunt I cannot imagine reading it. When you work on Wall Street the pronunciations of the Maestro were daily background noise. If you knew what was really going on, was pretty clear that the Maestro did not.
I suspect it contains a lot of revisionist history, and there are too many other really good books that are in my queue waiting to be read.
I recall reading that in the 50’s and 60’s the government bought something like 80% of all computers. Without the government as an early market for such things, there would have been no computer revolution and that leaves aside the fact that things like the Internet were created by the government.
The government doesn’t have to pick winners and losers, as you say repeatedly, but it can really help kick start an industry, increase innovation and bring down unit costs.
I like Obama’s energy program. It doesn’t go as far as I’d like, but perhaps it goes far enough. I guess we’ll see.
More than agreed on basic research.
CNBC is a funny animal — there are moments when they really do a fantastic job of bringing talented hard to get fund managers and economists ends make them available to the viewing public.
Unfortunately, there are too many other moments, when it’s inane, when guys who have been consistently warm for years are brought out his experts, the lack of accountability and the lack of a track record of the guests is in my opinion the biggest weakness of the network
Hate to say it, but he’s flipped on this too
http://www.wired.com/wiredscie…..guideline/
Would anti trust action to break up companies help because right now the big banks and companies like GM are to big to fail.
And to be fair GM, Chrysler, Ford are all to alike to fail.
Keeping things small and diverse would help. Or should we go with standardization GM, Ford, Chrysler could save a ton of money and storage space if their parts were interchangable. The outside of the cars onlt need be different. Also less training for the mechanics.
Imagine how easy it would be to audit banks if every accounting procedure, every form, every bank product were exactly the same at every bank?
The French do this with their Nuclear plants it speeds inspection time also when one plant has a problem they know the others will get the problem and try to correct it.
Mr. Ritholtz, let me join the others in welcoming you to FDL.
Two quick questions:
Any thoughts on how to rein in speculation in oil?
Wouldn’t public funding of elections reduce the influence of Wall Street re: bailouts?
It’s less nefarious than that.
There still exists in old boy network. There is a form of meritocracy, where elected officials trying get “best and brightest.” I jokingly say we have two “G” brain trusts — Google on the West Coast and Goldman Sachs on the East Coast. but neither has a monopoly on intelligence, or good policy, or even more important good judgment. I which the government would rely less on Goldman Sachs and go to other firms or academic institutions more often.
Goldman Sachs simply has an undue influence on the United States government. It’s inappropriate, and unseemly.
Obama is doing that I thought do you think he should do more, faster? How much more faster?
How do you assess what the Administration has learned from its bailouts? It seems Geithner et al are backing away from most the principles they laid out. It’s been “nevermind” for the PPIP, for exec compensation, for “too big to fail” = too big to exist.
Is it correct to view the predominant view as:”There is nothing fundamentally wrong; they fell down, so we picked them up, but they’re fine to go back to doing what they were doing, except they should please be more careful.” Do you see it differently?
Not really
I don’t buy the reverse darwin winner-take-all argument. I think this nation is still a meritocracy. A hard-working talented person can rise up from their circumstances and get ahead in the world. Look no further than the president.
I grew up a middle-class kid, put myself through college and grad school, found away to create a job doing what I love. That anyone please me for this is beyond my wildest imagination.
There is no doubt that wealthy and well-connected people get away with a whole lot more than less wealthy or poor people who do to their lack of money also lack political connections. But the number of people who have managed to fines a degree of success and comfort through their own self-reliance is still significant.
Maybe it’s hokey, but this still remains a land of tremendous opportunity and freedom. We just have to stop the asshats at the top of the pyramid from ruining it for the rest of us!
The prez of SUNY-New Paltz urged me to read it because it’s so amazingly wrong about the all the financial innovation. Greenspan wrote the book at just the wrong time.
It’s taking me a long time to read it because I talk back so much.
The other interesting blind spot and inconsistency Greenspan has is that clearly he believes in a mixed economy, i.e., some government involvement along with a private sector. However, nowhere does he address the issue of why he thinks govt contributes in some areas but not in others.
I was not a fed watcher on Wall St., so I didn’t pay too much attention to him, only what the consequences of his actions would be on the macroeconomy. He must have been displeased to see my report after the LTCM bailout, titled “Beginning the Next Bubble,” written 11/13/98.
Well, like I say, commit to refitting 90% of all building within 12 years, and making the entire country’s power grid capable of handling small point generation, say. The key to good stimulus is to make sure that people know there’s a huge opportunity, so that businesses invest in it bigtime. The key issue is bringing down unit costs bigtime. Of course, part of the problem is that the rest of the world is ahead in most of these techs, but some smart industrial policy could give US companies a shot.
Take the car company suppliers and move some of them into train manufacturing for high speed trains. Commit not to studying it and small trials, but “we will ahve the west coast and east coast corridors and a connection to them by X years.” Get the money going, and pass an eminent domain bill so you can take the land at reasonable prices and not get gouged.
When I worked at Goldman Sachs from the mid-70s to mid-80s, they sent their pac literalture around with strategizing about supporting candidates from both parties. That why I’m so sure that their additional strategizing about TresSec whet on in the exec suite.
It seems that, except for Elizabeth Warren, both the administration & congress act as though this is a manageable public relations problem. There’s nothing more dangerous than misunderestimating the nature and scale of the crisis.
One question I should ask. Is there any bailout which you, if you were President or Fed chair, would have done yourself? Or would you have done everything as you say in the book, by either letting them fail or through FDIC reorganization:
The companies that are “too big to fail” are not remotely close to monopolists. Even Citigroup — they don’t even have a 10% market share.
What has to happen is that financial companies are not allowed to bulk up for the sole purpose of getting larger. Right now, 65% of the bank deposit assets in the United States are held by the 10 largest banks. The great irony of this is that this 7000 banks that holds the remaining 35% or so, are small or regional players, avoided the leverage, Securitization, exposure to toxic assets, or any of the other foolishness that the big banks engaged in. Indeed, most of these small banks or AAA rated (real AAA not the nonsense that the rating companies slapped on junk products).
Remember back in the 1980s? We had let these banks get big in order to compete with Sumitomo, Bank of Tokyo and Mitsubishi Bank. All these Japanese banks that would take over the world. Only not so much their banks also got too big to succeed and ended up bringing down their economy which was in a recession for more than a decade.
So Monopoly legislation isn’t the solution its ordinary legislation that limits the size these banks can get taken number — 5% — 2% — 1% of the nation assets should be the ceiling for some of these companies.
“We just have to stop the asshats at the top of the pyramid from ruining it for the rest of us!”
Okay, but is there any evidence that the current Administration or Congress wants to do this. Except for the auto industry, they all seem quite willing to leave the asshats who ruined it in charge. Not just the individuals, but the self-centered class who believes as they do.
The one characteristic that defines the current governing ethic in America — it’s elected officials, the President, Congress, the media — is that no one is held accountable as you get closer to the top.
Whats your opinion on the Business Media I think Jon Steward’s take down of Jim Cramer who to be fair is much better than Kudlow. Has taken the air of Authority the air of being rich and therefore right away from the GOP.
This Air of Rightness was the cover of Authority the GOP used to sell America on Less Government regulation.
They used the threat of Government Regulation to justify why jobs were sent over seas.
The flat taxers in Eastern Europe are now getting bailout, Iceland is in Crisis, Ireland all the probusiness market darlings.
I expect the low cost manufacturing countries China, Mexico etc to be next unless things get better.
My questions are how much Cred has the Business media lost in the public, Washington, the White House and the GOP?
Also when if ever will the Disaster of Laissez-faire world wide get covered by the business press?
The 70’s disaster in South America by the Chicago School nuts still has not been addressed yet by the business press.
1) It’s much more than speculation that school is oil prices to go through the roof — I think that the move from 120 up to 147 was speculation — but not the rest. (See this for a laundry list of factors and: The Costanza Energy Policy: 25 Ways to Drive Oil to $150 http://www.ritholtz.com/blog/2…..il-to-150/)
2) I assume public funding of elections would reduce the influence of all big corporate donors.
Every chapter in the book begins with a quote from someone wiser and more accomplished than I can. One of my favorites is Princeton professor Alan Meltzer who said “Capitalism without failure is like religion without sin; it just doesn’t work.”
When a company through its own mismanagement or recklessness or excesses finds itself in solvents there should be no other option except for that company to be put into bankruptcy or receivership. Everything that’s ever been described as systemic risk we have invariably found out years later that it was no such thing. Who really thinks Bear Stearns was systemic risk? Do you believe it had to be rescued, could not be allowed to collapse?
I don’t think the administration has learned that lesson yet.
Another great irony is that exactly the opposite happened than was supposed to. Banks were allowed to get bigger and diversify, so the theory said, to spread the risk and make them safer. Instead, it spread contagion. And the dorky little community banks, all undiversified and uninnovative, many came thru with flying colors.
Don’t think there’s the slighest recognition of that in D.C.
I think that’s true. And yet, every recent study I’ve seen shows that intergenerational social mobility in the US has declined. 30 years ago it was the highest in the Western world. Now it’s the lowest. You can still make it, sure, but it’s harder than it’s been in a long time, perhaps in American history (though it’s hard to be sure about that, given the lack of 19th century stats).
Wired magazine has a nice little issue a month or two ago about revitalizing the electrical grid / infrastructure in the US.
lots of thought provoking ideas in it
Sheila Bair of the FDIC is another solid player in the regulatory environment. The FDIC does a very good job
Thanks for making that point. The myths of American never die (and some were never true to begin with).
8 years of Bush Reverse Darwin Chimps running the Zoo is why we are in this current mess.
Well to be fair Reagan started it.
I believe that talented people can still make it but Bush’s policies seemed to be designed to make it harder for talented people to move up, which of course protects the less talented who inherited the top.
I think you can be talented and inherit money Al Gore is the most accomplished ex President out their. (I think Carter is the most humanitarian).
The whole Class Warfare GOP Meme pisses me off.
I wouldn’t expect any lessons to be learned when the same people and same mindset that caused the ruin still haven’t owned up to their collective responsibility and are still arrogantly guiding policy.
I’m certain that Summers still wonders why women aren’t good at math.
Not a single bell out was necessary to save the economic system. What it saves was our psyches, they relieve the stress of the economic earthquake. But it did not solve the underlying problems.
One of the fascinating things about working on Wall Street with investors is the way they react psychologically to external events. The classic line we hear is “Just get me out of this market. I can’t take it anymore I don’t care if I’m losing money just sell”
it’s not rational it’s not intelligent it simply MAKE THE PAIN STOP. Essentially, that’s all these Bailouts were — a salve for the psyche of the major players in Washington and Wall Street.
Walk down the list: Bear Stearns? Who cared if they went belly up. Maybe JP Morgan who had about $4 trillion in derivative trades between the two of them. But if that’s the case they should have bought them without a government $29 billion check.
Lehman Brothers? Another big “who Cares if they die.” so a small investment bankers out of business big deal.
And no, the death of Lehman didn’t kill AIG. The same factors that led to Lehman getting caught in a riptide and sucked out to sea impacted AIG also. One didn’t call is the other they were both killed by the same disease: too much leverage too much Derivatives too little risk-management overexposure to mortgages. it’s not rocket science, it’s very obvious and yet people continue to make excuses and blamed the wrong things.
Bank Of America? Let them die! Citigroup? Can’t put them down fast enough.
The best thing for the government/Fed/FDIC to do in this period of crisis is make sure the receivership process runs smoothly — make sure that bankruptcies are handled in a orderly fashion, a controlled descent rather than a freefall
Substitute Reverse Social Darwinism for Cronyism?
I’ve been fairly critical of the business press — especially the parts that completely missed the coming crisis.
This led to a post this week: How to Fix Financial Television http://www.ritholtz.com/blog/2…..elevision/
At the Big Picture conference earlier this month, a panel on the financial — it was quite fascinating ( http://www.ritholtz.com/blog/2…..nce-recap/ ) the video will be online eventually.
MSNBC Kudlow the network seems like a GOP political ad. I admit I have not seen Fox Business news coverage.
I/We attack Obama all the time for being to Center sometimes I feel to much
Maybe there is a decrease in the social mobility, compared to 20 years ago. I can only speak from personal experience, the academic studies on the subject matter are less than perfect.
I am over-exposed to technology and startups, and venture financing. There is still a tremendous amount of opportunity for any guy or gal who comes up with a great idea and builds into something useful.
I know :) I’ve seen your stuff around the business blogs. Thats why I respect your take on this issue you have been in that fight when nobody else on tv was willing to say it.
One of the things that I keep hearing about the Bailouts that I want to correct is this myth of the random accidents, the perfect storm.
The economic collapse of 2008, the housing boom and bust, the credit crisis — these were the results of a series of decisions made over the course of decades, by corporate executives, by central bankers, by regulators, by Congress critters — it was not a perfect storm.
Indeed, the timeline I lay out in the book makes the collapse all but inevitable.
See this: http://bailoutnation.net/2009/…..to-crisis/
Barry, thank you for being here – and thanks to Ian for hosting and Bev for making these Salons happen.
I’ve not yet read your book (though Ian’s review ensures I shall), so please excuse me if you cover the following question there.
If we assume there ultimately will be some sort of public health insurance plan (either single payer or a public option as one of many), would you see a role for the private health insurers in providing the equivalent of what used to be “Medigap” policies (the products once offered to seniors that took care of their Medicare co-pays and other services). If such instruments end up being part of the private market after the Federal plan is worked out, would these products require regulation beyond that of the fairly stringent rules that governed the Medi-gap market?
I think the quote that speaks best to that from the book is this:
Save the banking system, not the bankers. Or as I’ve put it in the past, what is important about banking is what it does, not who does it.
Well, I hear through the grapevine that CNBC has not been too happy with me. Funny thing is, that piece was not about them — it was a very general (and I think thoughtful) critique.
It got picked up by numerous journalism schools, so that confirms my bias that it was a fair and balanced look at the financial media.
I have zero objectivity about health care.
I had a torn rotator cuff a few years ago and despite having excellent healthcare insurance and a high paying job, it was a friggin bureaucratic nightmare. I am in favor of ANY SYSTEM that is different than what we currently have.
My solution is to take everybody who works for any HMO and have them executed slowly and painfully.
Like I said, zero objectivity . . .
Yes. It wasn’t a random event, it was perfectly predicted and predicted by a lot of people, including very prestigious economists. Yet the odd thing is that despite it being predicted by, oh Nobel Laureates, and so on, 3 years ago, the media and official organs all thought the possibility was absurd. The “masters of the universe”, meeting in Davos, practically mocked those who saw it coming as unsophisticated rubes who didn’t really understand who the world worked.
It turned out those rubes understood, and the people in charge didn’t. And yet almost everyone managing the crisis now is someone who didn’t see it coming, from Bernanke and Geithner to Larry Summer and beyond. (Bair is one of the few exceptions I can think of).
Why did they not see it coming? Why didn’t they listen, even to highly respected economists? Short of getting rid of all of them (which the window has closed on) is there anything that can be done to make them aware enough that they might listen next time around, in time to stop the next disaster?
I don’t think that was part of Lloyd Blankfein’s plan.
That is the key to the failure of the Hank Paulson/George Bush approach. It also is what’s wrong with the Obama/Geithner/Summers approach.
They all try and sell the economy is good buy this stock. They rarely ever say anything bad before the news hits the papers and courts.
Their record of Predictions is horrible everything’s a Buy Now the economy is turning around now.
Except when its Obama’s fault they never acknowledge their own mistakes.
But yes I do like the issues talk even when I scream at them. I would like the TV to focus on our issues more and give us a voice.
I want to see Kudlow and Cramer talk green stocks like Vestas Wind Systems they never gets any coverage but its been a much better bet than any oil company and they get tons of business channel coverage.
Welcome Barry. Great blog you have. A Regular reader. I was wondering something. Do you think Goldman occupies now what Lazard Feres did in the past? Or has Goldman always had the sway it does now? Just not so publicly.
What they don’t like you? They need to give you a show you could be the Keith Olbermann of MSNBC Cramer their star has lost his Cred.
Should you implement that solution, I believe you’ll have millions of helpers. *g*
Here’s an anecdote I heard from a transplant coordinator RN who left the UC to work for one of the major health insurers, based in SoCal’s San Fernando Valley.
The nurse ended up working with the health plans sold to ensure US travellers abroad. When a policyholder had catastrophic health problems while in Russia, the plan figure it would be far cheaper to let the policyholder twist in the wind and die (and pay the minimal costs expected) than to Medivac out of the middle of nowhere and pick up the very costly care the policyholder now required. They “slow-walked” the medivac logistics to bring this about.
Whhich is why my nurse friend quit and came back to UC.
Getting your book.
i agree with your analysis of Greenspan doing price supports for equities rather than dealing with the economy. Roger Morris discusses the MIC funding by the “village” Why vote against the war supplemental? Listen to Roger Morris run down the Village power structure maniplulation.
Naked Capitalism (Yves) and Calculated Risk give opinion and data on the economy. There seems no corolation between fed and treasury policy and th economy.
Ian offers a plausible strategy to move the economy in a sustainable direction,Do you see a way to move in these directions? Thanks for the post.
A friend who is following the discussion (but cannot log in) emails the following — and it is on point to what Ian wrote:
This is my favorite passage in the book:
“Saving the U.S. financial system bound Paulson and Bernanke together in common purpose. That neither man saw it coming further ties them together. There is a third factor they had in common: They each saw a leadership void as things progressed into crisis.
Indeed, about now you should be asking yourself why a cabinet department and a central bank were running the greatest government rescue operation in history. And you may be wondering, “Where is the man at the top of the organization chart?” It is a fair question. Why did George Bush go AWOL during this crisis period?
Indeed, during the second half of 2008, one got the sense that the Bush White House had no stomach for the entire affair. The bailouts were a repudiation of everything the president believed in; perhaps he simply couldn’t bear to take the lead on something he found so philosophically distasteful. Bush’s approval ratings were at record lows, his legacy and reputation in tatters. In the latter half of 2008, the sense was that the Bush White House was running out the clock. As Bush’s last term was ending, the wheels came off the bus. Then the bus caught fire, rolled down a ravine, and ended up at the bottom of the sea. Running out the clock may have seemed easier than the alternative.”
~~~
That is red meat for this crowd!
Greetings! Do you think we can ever de-couple our government from its bailout addiction without public financing of elections? It seems to me that the linkage between money and politics has become toxic to the survival of real capitalism.
Cronies, Reverse Social Darwins the mindset behind this attitude is what worries me that and they are still in charge and still have not admitted their mistakes.
I do not believe Goldman Sachs has ever been more powerful than it has been from 1986-2009
They are extremely influential . . .
That is red meat for this crowd!
You are so right!!
Its the Ford Pinto solution — cheaper to payoff the death claims than fix the issue.
Note my prior post on slow and painful execution. That’s too good for these weasels.
Thanks for your reply. And just to let you know. I’ve convinced a couple local libraries where I live to stock your book.
Except I don’t believe it. George Bush ran the biggest gravy train that corporate America ever saw. He codified our “shake hands with Uncle Sam” economy.
Iraq, no-bid contractors, the ballooning pentagon — I don’t see how anyone can look at TARP as an anomaly. It was one last looting before he left. Of course, more followed, but that’s another story.
When these stocks become money makers — or high fliers — that is when Cramer will discuss them.
Larry on the other hand has gone off the reservation — I think he took the death of Bear Stearns, where he worked for many years, way too personally…
That is a great question Did Bush not understand what was going on? Was he afraid of his Free Market Conservative Legacy being tainted by a bailout for the rich and so kept his finger prints off it? A bailout necessitated because the rich were unregulated?
If Bush was really AWOL as Decider then just who was really in charge? Was Cheney really in charge of the Presidency and the bailout then?
The giveaways during the war were reprehensible — but the Bank bailouts were more Paulson than Bush.
My favorite joke about W in the book is by Allan Mendelowitz who observed: “The Bush administration, which took office as social conservatives, is now leaving as conservative socialists.”
That is more than amusing — its surprisngly true!
If I missed any posts, please rephrase them — they are now scrolled too far away (almost at 100 comments)
Yes, and you’d think certain sections of people would be trying to hide from that. Not to mention Reagan wasn’t too much better on that front. And yet he is a martyr.
The transfer of wealth from the working class to the uber rich goes on. Isn’t that what all of this is about?
The way out of the recession is known the question is how can we make it happen?
Yeah I would say that whatever Bush claimed to be in favor of, he always seemed be serving a higher master. He never met a wealth tranfer he didn’t like.
Here is another excerpt: This is the list of people I hold resposible, in more or less the order of their culpability:
• Federal Reserve Chair man Alan Greenspan
• The Federal Reserve (in its role of setting monetary policy)
• Senator Phil Gramm
• Moody’s Investors Service, Standard & Poor’s, and Fitch Ratings (rating agencies)
• The Securities and Exchange Commission (SEC)
• Mortgage originators and lending banks
• Congress
• The Federal Reserve again (in its role as bank regulator)
• Borrowers and home buyers
• The five biggest Wall Street fir ms (Bear Stearns, Lehman Brothers, Merrill Lynch, Morgan Stanley, and Goldman Sachs) and their CEOs
• President George W. Bush
• Treasury Secretary Henry Paulson
• Presidents Bill Clinton and Ronald Reagan
• Treasury Secretaries Robert Rubin and Lawrence Summers
• FOMC Chief Ben Bernanke
• Mortgage brokers
• Appraisers (the dishonest ones)
• Collateralized debt obligation (CDO) managers (who produced the junk)
• Institutional investors (pensions, insurance fir ms, banks, etc.) for buying the junk
• Office of the Comptroller of the Currency (OCC); Office of Thrift Supervision (OTS)
• State regulatory agencies
• Structured investment vehicles (SIVs)/hedge funds for buying
the junk
While we still have you here, one last question — what do you think the relationship of the financial blogosphere is to the financial community? As opposed to, say, CNBC?
Uh yeah, Phil Graham deserves a spot next to — if not in front of — the HMO employees.
I bought Vestas at $19 before hurricane Katrina today about $75 before the bank crisis over $100.
http://www.google.com/finance?q=NYSE%3AXOM
Exxon 10 year chart 2002 $40, current price $73.78 prebank crisis high $95.
Vestas might not be a high flyer I don’t know how you define that but it has done better than Exxon and they have gotten much more business airplay from Cramer.
I think big companies with connections/clout get special treatment from the business media.
Why exactly I can only speculate but its why I didn’t trust them much even before Jon Steward destroyed Cramer.
It’s more than a mere transfer of wealth from the poor to the rich.
What is so amazing and this — and it goes back to my comments about crony capitalists sitting on the boards of directors — Is how much money is then transferred from the wealthy to the uber wealthy, from shareholders to corporate management.
If you want will affect change in its this area of the economy, then matters of corporate governance are the pressure point for making companies behave responsibly i.e. observing their fiduciary obligations to their shareholders.
Late to the party here, but have a question: What happens, and what effect will it have on the various parts of the economy, both private and public, should Chrysler fail. I ask this because, I simply do not believe it is viable even with Fiat.
The best quote I heard about the Gramms was that Phil and Wendy Gramm are the Bonnie and Clyde of derivatives.
It’s it’s a shame I learned that quote too late to get into the book
As we come to the end of this lively Book Salon,
Barry, Thank you for stopping by the lake and spending the afternoon with us discussing your new book and the financial crisis.
Ian, Thank you very much for Hosting this great Book Salon.
Everyone, this is a must-read book, if you haven’t bought Barry’s book yet, here is a link.
Thanks all.
Barry, thank you very much for being here today and being so responsive to questions.
I was surprised how much I enjoyed reading the book. Having covered the bailouts in more or less real time, I figured that reading more about them wouldn’t be much fun, and was quite surprised that it was (if infuriatingly so at times). The book is especially useful to folks who don’t have a financial background, but who want to know what’s going on – it’s accurate, doesn’t oversimplify, and is well written.
Any chance those guys will ever be held responsible for what they did? Is anyone still trusting their ratings? Any attempts to really change their future ratings and make them better?
It’s true that nature abhors a vacuum and so does the Internet.
I may be a critic of the MSM but I am also a huge consumer of media. It’s incumbent upon readers to be aware of who they read and watch.
I actually don’t read the Wall Street Journal, I read Justin Lahart and Jesse Eisenger. I don’t read the New York Times I read Floyd Norris and David Leonhardt and Paul Krugman. I don’t read Newsweek I read Dan Gross.
I read an MSM of my own construction because I am familiar with certain writers history and track record. That is important to me. There is plenty of really good stuff out in the MSM you just have to sift for it.
As to the role of the blogosphere, as long as it fills the void, steps into the vacuum of doing the serious analysis, informed commentary and smart reporting that seems to have gone missing in various parts of the financial press, it will be a major role for them to play.
Thank you for the kind words — after The long hard slog of writing the book, it’s gratifying to see how well it’s been received.
Let me leave you with these last two links:
All the book’s reviews:
http://bailoutnation.net/category/reviews/
My blog
http://www.ritholtz.com/blog/
Thanks again for having me!
What no mention of Acorn! What about the Federal Government forcing banks to give home loans to people with No Income, Assets, jobs etc the Ninja Loans!
I don’t think MSNBC will like your list:) Not a Single GOP talking point.
My understanding is that the personnel at the highest levels of these organizations who were involved in these decisions have all “retired” and the organizations are now led by entirely different management teams.
Bye Great Talk please come back.
Thank you Barry and Ian. This was an illuminating conversation.
Barry, the comments section will be open for 24 hours in case you want to come back and read additional comments and questions.
You are welcome back any time to join us in our discussions.
Spencer Ackerman is upstairs!
Iran: Don’t Lead, Don’t Follow, And Instead Get Out Of The Way
Thank you Barry! So good to have you hear. And once again…the book is great:
https://www.amazon.com/dp/0470520388?tag=firedoglake-20&camp=0&creative=0&linkCode=as1&creativeASIN=0470520388&adid=1QSMDAQ4PCMXXWAC4ZCD&
I actually address issues such as the CRA and Fannie Mae in a chapter titled “Misplaced Blame.”
Thats good unless they got golden parachutes, but still the important thing is they are out and that their replacements know why they are out.
This is the first good new I have heard about the economy in a while.
Enough your comments about Cronies made sure that I would buy the book.
Cronies in action the social dynamics of a herd of sociopathic chimps dividing up the
foodeconomy.Can a group survive if everyone acts in a selfserving way at the expense of others? Real
WorldEconomy the White House.Hey we all get different things out of what we read based on our own mindsets:)
Sara Robinson is upstairs!
Memo to the Right Wing: Put Up or Shut Up
Nope — Same Boards of Directors at most of these firms, and many of the “C” level execs are still there.
Indeed, most of the people responsible for many corporate disaster at mid-level are still at work. Only a handful of examples have been let go.