In The New York Post today, Bruce Bartlett makes the case for why trouble in the financial sector merits federal intervention, relying on the particular nature of financial institutions:
The basic problem is that the financial sector faces systemic risk in a way that no other industry does: By its nature, it is a house of cards that can collapse at a moment's notice.
[...]
What prevents this house of cards from falling is confidence: People don't feel compelled to hold all their money in cash under their mattress and the system functions smoothly.
But, should confidence be shaken, the risks are very great indeed.
This is a good article to e-mail your less financially savvy friends to help explain the mess to them.
The Gang of 192
The Bartlett article is pretty much the way I see it too. And, I think Robert Shiller--who correctly predicted the RE bubble--is also of this opinion, if I read him correctly last Thursday night in Seattle. Unfortunately, almost no one in the audience seemed to understand what is at stake.
And, it's not just the public. I'm friends with a few of the economists who signed the 'just say no' letter. I didn't get very far with one of them, making essentially the case Bartlett is making.
Yep. And that's how the prudent banks get whacked
along with the imprudent ones. There's no saving one part of the system only; the solution has to address the entire system.
When a panic occurs the innocent get taken down with the guilty. The fire that started at Bank A quickly spreads throughout the system . . . it is a networked, codependent system. Banks are not stand-alone silos . . .
They need to pass this bailout now, and then we need to all get down on our knees and pray that it works to unfreeze the credit markets.
God Bless Mr. Bernanke. He's a man of uncommon courage.
Lombard Street
I wrote that column after rereading "Lombard Street" by Walter Bagehot, who said it better than I could.
Thanks Bruce
I just ordered the book. Looks great.
Just realized book is in public domain
I checked the copyright date . . . written in 1873, so realized it should be available for free.
And lo, it's on the internet for all to read:
http://www.econlib.org/Library/Bagehot/bagLom.html
Regulation
If Bruce thinks we should take the very expensive step of intervening in a crisis, then it makes a lot of sense to impose less expensive regulations that will avoid such crises in the future.
Bartlett Better than Bagehot
For the 21st century reader, Bruce said it better.
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