Two views on the bank bailout
March 31st, 2009
Two alternative views on the baking crisis. At TPMCafe, Bernard Avishai is unconvinced by Paul Krugman’s concerns, and asks Two Lingering Questions for Krugman:
So the first question is this: Given how much faster financial capital and entrepreneurial information move today than they did in the 1930s, or even in Japan in the 1990s, can we not assume that the pace, not only of decline, but recovery, too, will be much faster than any historical precedent? The president implied that he thought so in his “Sixty Minutes” interview last week, when he spoke of how “wired” the world has become….
So the second question is this: Do bankers, for all their faults and grotesque enrichment, know some important, subtle things about managing risk, assessing business plans, providing financial services, and so forth that we dare not lose during the process of recovery? Is there not real know-how here, not just know-about (that is, insider stuff, like ways of betting against “AIG’s book”)?
At the Atlantic, however, in The Quiet Coup, former IMF chief economist Simon Johnson sees strong similarities between major crises in developing countries and the US crisis:
In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn’t roll over their debt did, in fact, become unable to pay. This is precisely what drove Lehman Brothers into bankruptcy on September 15, causing all sources of funding to the U.S. financial sector to dry up overnight. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people.
But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.
Johnson concludes, rather pessimistically:
The conventional wisdom among the elite is still that the current slump “cannot be as bad as the Great Depression.” This view is wrong. What we face now could, in fact, be worse than the Great Depression—because the world is now so much more interconnected and because the banking sector is now so big. We face a synchronized downturn in almost all countries, a weakening of confidence among individuals and firms, and major problems for government finances. If our leadership wakes up to the potential consequences, we may yet see dramatic action on the banking system and a breaking of the old elite. Let us hope it is not then too late.
Entry Filed under: Obama administration,Politics