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This not only is the best article on the Wall Street mess I have found. It is the best financial article I have read in many years. I will be following Ms. Gelinas' writings henceforward.
Nicole Gelinas is an analyst with the Manhattan Institute for Policy Research www.manhattaninstitute.org
WALL ST. DEBT KNELL
US FINANCIAL SECTOR IS BROKEN
By NICOLE GELINAS
crisis.
Posted: 4:06 am
September 22, 2008
September 22, 2008
UNCLE Sam is acting not out of cool rationality but out of hot terror.
In defense of the proposed $700 billion at tempt to salvage what's left of the financial-services industry last week, President Bush said that "this is a big price tag because it's a big problem."
Thing is, it's not clear this is a solution. There's no guarantee that even this much cash can buy us out of a systemic financial crisis. Even if it does, we probably face years of necessary financial and economic readjustment.
Consider: In the space of six months, the feds have bailed out bits and pieces of the financial sector, starting with protecting investment bank Bear Stearns' private lenders in March and ending, most recently, with the $85 billion loan to insurance giant AIG.
Yet all the might of the federal government couldn't stop the global markets from rendering their verdict, anyway: The American financial sector was and still is a toxic soup.
Last week, the markets put their final seal on that verdict: Investors large and small, domestic and international started pulling their money in droves out of the last pillar of the private credit markets: the money markets.
Many people and institutions have long treated such funds as "safe" savings accounts, even though they weren't insured by the feds, because they invest in only the highest-quality short-term debt - corporate, bank and government.
But no more. Midweek brought news that two such funds had lost value due to their investment in Lehman Brothers - only the second and third time such a thing had happened in the funds' four-decade history. Another fund had to close up shop because so many investors wanted their money back.
Overall, Americans pulled 5 percent of their assets out of this $3.4 trillion market in one week.
More pullouts would force the funds to sell more of their debt investments, pushing their values down further, causing more losses.
That threatened disaster for a market that provides lifeblood to the economy - namely regular financing for all kinds of entities, from credit-card companies to auto lenders and down to you and me.
Without money markets, the US economy would grind to a halt - and then quickly go backward.
So the White House announced that it would guarantee the value of those funds.
To find a precedent, you have to go back to 1933 - when the Hoover administration in its waning days hastily signed a law temporarily guaranteeing bank deposits so that savers would stop fleeing the system. (This later became the permanent FDIC, showing what kind of sea changes we're dealing with here.)
Back then, one congressman said, "The United States today is on the brink of economic and financial chaos." That's just as true today.
UNCLE Sam is acting not out of cool rationality but out of hot terror.
In defense of the proposed $700 billion attempt to salvage what's left of the financial-services industry last week, President Bush said that "this is a big price tag because it's a big problem."
Thing is, it's not clear this is a solution. There's no guarantee that even this much cash can buy us out of a systemic financial crisis. Even if it does, we probably face years of necessary financial and economic readjustment.
Consider: In the space of six months, the feds have bailed out bits and pieces of the financial sector, starting with protecting investment bank Bear Stearns' private lenders in March and ending, most recently, with the $85 billion loan to insurance giant AIG.
Yet all the might of the federal government couldn't stop the global markets from rendering their verdict, anyway: The American financial sector was and still is a toxic soup.
Last week, the markets put their final seal on that verdict: Investors large and small, domestic and international started pulling their money in droves out of the last pillar of the private credit markets: the money markets.
Many people and institutions have long treated such funds as "safe" savings accounts, even though they weren't insured by the feds, because they invest in only the highest-quality short-term debt - corporate, bank and government.
But no more. Midweek brought news that two such funds had lost value due to their investment in Lehman Brothers - only the second and third time such a thing had happened in the funds' four-decade history. Another fund had to close up shop because so many investors wanted their money back.
Overall, Americans pulled 5 percent of their assets out of this $3.4 trillion market in one week.
More pullouts would force the funds to sell more of their debt investments, pushing their values down further, causing more losses.
That threatened disaster for a market that provides lifeblood to the economy - namely regular financing for all kinds of entities, from credit-card companies to auto lenders and down to you and me.
Without money markets, the US economy would grind to a halt - and then quickly go backward.
So the White House announced that it would guarantee the value of those funds.
To find a precedent, you have to go back to 1933 - when the Hoover administration in its waning days hastily signed a law temporarily guaranteeing bank deposits so that savers would stop fleeing the system. (This later became the permanent FDIC, showing what kind of sea changes we're dealing with here.)
Back then, one congressman said, "The United States today is on the brink of economic and financial chaos." That's just as true today.
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