Sunday, March 1, 2009

The Birth of the Conventional Wisdom

The Crash of '08 and the Great Recession are too complex to simply blame on one or two bad actors. But, the Left's effort to use it to blame a party (the GOP) and a philosophy of government is well under way. David Ignatious' essay "We Saw the Crisis Coming" shows the sort of contortions of fact that the advocates of Big Government and the DC elite have to make in order to make this "true."
Nothing about this crisis is really a surprise. People have been warning about it for more than a decade, in academic studies, official reports, Wall Street analyses, even op-ed pieces. Our smartest financiers, Warren Buffett and George Soros, saw it coming clear as a bell.
Ignatious is absolutely right that "people" foresaw doom in the government's efforts to use Fannie Mae and Freddie Mac as a means of lowering lending standards and facilitating the sale of subprime mortgages. Virtually all of these voices (except Buffet and Soros) were either conservatives or libertarians. Ignatious seems oddly reluctant to mention this. 

Ignatious then lets loose this howler:

This failure is especially clear in the case of three prominent people who are shaping the response to the crisis now: They saw the dangers building but failed to take decisive action -- for fear that a new financial architecture would frighten the markets.

The three who saw it coming are Robert Rubin, the treasury secretary during the Clinton administration; Lawrence Summers, Rubin's successor at Treasury and Barack Obama's chief economic adviser; and Timothy Geithner, who served under Rubin and Summers, then headed the New York Federal Reserve and now runs Treasury.

What?! What did any of these guys do to avert the "coming" crisis? Rubin and Summers were part of the now discredited "committee to save the world," discredited because no one now believes that a handful of gov't officials in DC can make the world financial system bend to their mighty resetting of interests rates. They were also part of the permanent Democrat Establishment that used GSE's as their method of achieving their political goals outside of the political arena.

As for the Indispensable Man, he has been in the room during all of the lousy decision making over the last 2 years. No, Geithner, Paulson, and Bernanke cannot be "blamed" for the current mess. There would have been a mess no matter what, it seems. But they can be blamed for throwing hundreds of billions of $$ into a few financial blackholes to no apparent good effect.  

Ignatious' descriptions of Rubin's activities are especially (ahem) judicious in their selectivity.
First, Rubin: During the boom years of the 1990s, he was deeply worried about the risk of systemic failure in the financial markets. He was especially nervous about derivatives, the exotic financial instruments that were being created willy-nilly on Wall Street. Rubin hadn't run Goldman Sachs that way, and he feared the new crowd was taking risks they didn't understand. In the event of a crisis, would the window of transactions be wide enough to maintain orderly markets? Or would liquidity simply disappear?
Rubin pinpointed all the right issues. And yet when pressed in interviews about a new financial architecture to reduce these systemic risks, he would shy away like a skittish colt. Famously, he balked at the recommendation of Brooksley Born to regulate derivatives at the Commodities Futures Trading Commission
Yeah, that Bob "Skittish Colt" Rubin, he was real torn up about it all. 

The truth is that Rubin made $100 million in less than a decade working at Citibank as some sort of quasi-consiliergi. Citibank has now received tens of billions of dollars in gov't $$ to save it from the frauds, gross negligence and manipulations that occurred on Rubin's watch. Ignatious is well aware of this. But he's counting on the fact that the people reading his Mandarin-esque analysis will NOT know these crucial facts. 

Parenthetically, I note that Ignatious includes Rubin in this group of "three prominent people who are shaping the response to the crisis now." Is this true?! Is Rubin really working with the Obama Administration on dealing with the banking crisis? Right now? Is he "helping" with the Citigroup bailout? Because if he is, that seems like a conflict of interest that the average person would need to know about. Rubin wouldn't just be interested in saving Citigroup. He would be working to save his reputation (which would never recover if the truth of his role at Citi was ever fully explained), and his $$ (which must seem pretty vulnerable with the air full of demands for "clawbacks" and the like). 

Ignatious does admit that decisions approved by these three policy makers have made things worse. 

The paradox is that many reforms of those years have actually made things worse, by building in pro-cyclical forces that accentuate the downturn. This was true with the so-called "Basel II" capital standards. By requiring banks to maintain high reserves during crises, it forced them to sell assets into a falling market, compounding the downward pressure.

Other reforms had similar unintended consequences. The mark-to-market rules adopted by the accounting profession had the perverse effect of forcing banks to write down their portfolios daily as the market for securitized assets collapsed. These "marks" were often imaginary, since there was no real market. But banks had to take huge write-offs anyway, accelerating the death spiral.

Then, why exactly should they be in charge of the clean up? Their reluctance to do away with "mark to market" rules simply looks like the behavior of people who don't want to admit their preferred policy prescriptions have failed. 

The media and the Dems have adopted the mantra - repeated like an incantation on the cable shows - that the crisis is the result of the "free market" system. The reality is that we had a market system in which government and a few super-banks were able to distort normal business activity with their billions of dollars. That was a "system" set up by the hip "New Democrats," not the GOP. The GOP had the only politicians actively working to reform the monstrous growth of the GSE's! 

Now, however, the Establishment, through its media voices like Ignatious, is actively working to change this truth into a sort of meta-Truth, easily distilled into a coherent bumpersticker slogan (perhaps to cover up all those fraying "Bush Lied. People Died" stickers); something like "GOP Greed Caused Billions in Need." This "truth" is, of course, an obfuscation of and distraction from the real story. 

I have said it before and I will say it again. There are a lot of smart innovative thinkers in the US. But, they are being shut out of the decision making process in alleviating the financial crisis because they don't belong to the political class represented by Rubin, Summers, Geithner, and Ignatious. Instead, the people whose decisions directly or indirectly lead to this mess are still in office and, in Geithner's case, have been promoted. We are told that elections have consequences, but in this case nothing has changed. 

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