One of the key points made by Holman Jenkins in this piece we’ve been talking about all day is the fact that federal policy uncertainty was a key contributor to the crisis. Sure, the banks made a lot of mistake, and many deserve to have taken hard hits (and fail outright), but in terms of the sheer panic we saw last October, it was an uneven response from Washington — during a volatile campaign — that really threw the match on the gasoline.
Proponents of the idea that it was the WaMu seizure (rather than Lehman failing) will certainly be receptive to this idea.
Lately a debate has raged over whether Wall Street or Washington is more to blame. But for certain analytical purposes, Wall Street and Washington are not two things but one. The decision to pour much of the nation’s risk capital into housing in the mid-2000s was certainly a joint production. But — at least since banker J.P. Morgan personally intervened in the 1907 Panic — only one party is responsible for systemic confidence anymore. That’s government. When systemic trust falters, all eyes turn in a single direction. Government necessarily becomes the only truly relevant actor, with all the perils and politicization that that portends.
“The only thing we have to fear is fear itself,” fdr said, naming the systemic trust challenge when he took power in the third year of the Depression. He perhaps should have stopped there. He went on to specify a “nameless, unreasoning, unjustified terror,” but fear is anything but “unreasoning” or “unjustified” in certain circumstances. It is a very reasoning and justified fear that money in the banks may not be safe; that when businesses with solid assets cannot raise cash to meet their obligations, they may become insolvent and lose their assets to their creditors. A loss of trust can bring a whole economy to the brink of collapse in a matter of weeks.
So — blame government, however unsatisfying and unjust that may seem, for allowing the subprime snafu to become a global panic. Government was the only party in a position to protect systemic confidence, but instead sent mixed signals — saving Bear Stearns, telling the world that there would be no disorderly failures of important financial institutions through bankruptcy; then letting Lehman fail through bankruptcy. It stepped up to save aig and pumped in improbable amounts of taxpayer cash — when it might just have nationalized the firm, declaring its debts sovereign debts, which would have stopped the collateral calls related to its subprime guarantees. How many more times could government possibly repeat the aig fiasco if other large firms needed rescuing? It was a rescue, but a far from credible one.
He goes on to explode one of Congress’ biggest hobby-horse ideas, that the crisis calls for the creation of a “systemic risk regulator” some all-seing man-god-regulator that can spot the difference between a healthy boom and a bubble and will know when to intervene to cut off bubbles, but who will also know when to let things take their course.
And besides, says Jenkins, we already have a systemic risk regulator named Ben Bernanke:
At some reptilian level, official Washington understands all this. Up has gone a cry in the aftermath for some kind of “systemic regulator” to prevent a reoccurrence and spare the political class from having to vote for bailouts in the future — though, in an evasion of reality, this über-regulator is supposed to spot bubbles and unwise risk-taking before they blow up, sounding a whistle just when investors are at the most enthusiastic lest investors inflict more losses on themselves than Congress will decide in retrospect should have been permitted.
In reality, we already have a systemic regulator — the Federal Reserve, whose traditional mission, in the colloquial description, is to “take away the punch bowl just when the party is getting started.” The Fed has been imperfect in this task in the past and will be so in the future.
What Congress doesn’t want to admit is that it wants not a systemic regulator, but a systemic saviour — an institution that can step forward and stop panic in its tracks. But we have one of those too — the Fed again. For all the arguments heard on Capitol Hill last fall that only a $700 billion appropriation stood between us and financial Armageddon, that $700 billion sum has proved a pittance compared to the resources the Fed, under Ben Bernanke, has deployed out of its hip pocket. The Fed has bought unwanted assets and issued guarantees to the tune of more than $1 trillion. It has created untold billions in excess bank liquidity through monetary policy. If we’re honest, the Fed’s ability to print money stands behind the fdic, which insures the nation’s bank deposits. It stands behind Fannie and Freddie, which are increasingly in the business of losing money on purpose to help the housing market. Even the U.S. Treasury has been edging sideways toward relying on the Federal Reserve to finance the exploding national debt.