Lehman Failure - Spencer Bachus & Fuld agree: it's the Fed's fault

Well, if proof were needed that Republicans have decided the financial crisis was the fault of the government and not of Wall Street, Bachus's questioning of the April 20, 2010 panel (with Fuld, former CEO of Lehman) during the hearing should put any such doubt away.

Fuld's testimony was, in effect, that neither he nor Lehman did anything wrong. The regulators said they did nothing wrong. So they didn't. And if the Fed had opened up its window to them, or backed Barclay to let it buy Lehman, or .... well, you get the idea.

So did Bachus question Fuld's denial of all responsibility? No he questioned a regulator from another government agency, not the Fed or the Sec, to elicit agreement that the Fed, in spite of protestations by Geithner, as former head of the New York Fed, and Bernanke, that it did have the authority to regulate Lehman, to stop its doing bad things and didn't do it.

I simply do not understand how the media let Republicans get away with their continuing defense of the very companies responsible for the financial meltdown.

Also clear from Republican declamations throughout this day's hearings is their belief, in spite of the meltdown following Lehman's collapse, that a "bailout" fund isn't necessary to assist in the orderly shutdown of failed institutions because the market should just let them fail. The market just let Lehman fail - and that caused the world's financial system to go into freefall.

The media, in their continued obeisance to Republican talking points, allow Republicans to characterize a fund to be funded by the financial institutions themselves as a government guarantee or taxpayer-funded bailout when its sole purpose is not to save an institution but to shut it down, fire its management, zero out its creditors, and use the money from the fund to help in the unwinding of positions.

But, of course, that would require the media to do their job, to do actual research. And that, of course, would be too much work. Indeed, since the SEC suit against Goldman Sachs was announced last week, our esteemed members of the press have wallowed, even gloried, in their inability to explain something very simple. Goldman sold a package of securities without telling the potential buyers a very critical piece of information: that the securities had been selected by a hedge fund which expected them to fail.

THE BAILOUT - WE'RE ALL ECONOMISTS NOW

From the street vendor to the cab driver to the President of the United States, we are all economists and financial experts now. Everybody (including my favorite bloggers) knows that the bailout package is good, bad, will work, won't work, etc., etc. The Congress should have done x, or y or z. Some cite certain economists for support. Most don't bother. What is uniform is their lack of doubt about their particular take on the problem if, of course, they believe that there is indeed a "problem".

The truth is much simpler and a lot more scary: NOBODY KNOWS WHAT WILL WORK.

We are in uncharted territories. Although, as The Economist (Oct. 4-10, 2008) and other publications have noted, we can look back at other economic crises (S&Ls in the 1980s, Sweden & Japan in the 1990s, and, of course, The Great Depression), there are two problems for people trying to draw lessons from them. First, they are all different in very important ways. Second, even economists disagree about their causes and whether or not the measures taken were necessary or the best available. (Some now wonder if letting Lehman fail did much more harm than good.)

Much of the difference in the opinions of various experts today can, I suspect, be traced to their convictions about the primacy of The Free Market. The ones who are sure that FDR caused the Depression by too much government interference (that the market would have worked itself back to health much more quickly if the government had just let people starve) pretty much oppose government interference today. And vice versa.

Is there a problem? Well, I think one would have to be living in an alternate universe not to recognize that we are in or close to a worldwide financial panic. That it may not be rational is irrelevant. Panics are, by definition, irrational. It is hard to imagine (though not impossible) that any proposed fix could be worse than doing nothing. And, as far as I can tell, the bill that passed the Congress gives the Treasury Secretary and the Fed a variety of tools for dealing with it. We can, at this point, only hope that they be pragmatic (is it working?) rather than ideological in their choices.

Experts may have caused this crisis, but that doesn't mean that amateurs and know-nothings (people who couldn't explain the difference between a stock and a bond let alone what a credit default swap is*) - including me - know enough to fix it.

I think a little humility would be appropriate.

*Ira Glass's This American Life once again comes to the rescue. Another Frightening Story on the Economy