John Cochrane on the Credit Crisis
By James D. Hamilton|Jan 31, 2010, 12:56 PM|Author's Website
University of Chicago Professor John Cochrane has an interesting analysis of the causes of the financial problems of the last few years.
Cochrane writes:
The signature event of this financial crisis was the “run,” “panic,” “flight to quality,” or whatever you choose to call it, that started in late September of 2008 and receded over the winter. Short-term credit dried up, including the normally straightforward repurchase agreement, inter-bank lending, and commercial paper markets. If that panic had not occurred, it is likely that any economic contraction following the housing bust would have been no worse than the mild 2001 recession that followed the dot-com bust….
Why was there a financial panic? There were two obvious precipitating events: the failure of Lehman Brothers investment bank in the context of the Bear Stearns, Fannie Mae, Freddie Mac and AIG bailouts; and the chaotic days in Washington surrounding the passage of legislation establishing the Troubled Asset Relief Program (TARP).
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This opinion, shared by many, is correct, however, yet again, no mention is made of the singular event that occurred in late September, that started the panic. Sources closer and more knowledgeable of the events of that time, have pointed out that it was the seizure of Wamu, that precipitated the true beginning of the meltdown, even the normally clueless Tim Geithner, was said to be furious at Sheila Bair's actions on that day in September.
As the Professor pointed out, short-term credit, and interbank lending, ceased almost overnight, as a shocked banking community realized, that nothing was impossible, and the FDIC had turned from protector, to predator.
Sheila Bair in the months to come, would make multiple PSA's, lauding her agency's "protection of depositors", an outrage in of itself. Sheila Bair, almost single-handedly, destroyed 10's if not 100's of thousands of investors and shareholders. The result of her actions, also DIRECTLY caused the failure of many dozens of the banks that followed for the reasons stated above, SHE was the self-fulfilling prophecy that wiped out trillions in wealth in this country. The Dow lost more than a couple of THOUSAND extra points, that wouldn't have been lost, had she not began the the single most destructive "regulatory" act in American history.
Sheila Bair is the modern day equivalent, of the Mrs. O'Leary's Cow of legend, the only difference is, THAT cow, was not WILLFULLY ignorant and destructive.
It is high time this one was put out to pasture, and never allowed near a lantern again. |
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