Tuesday, September 16, 2008
the crisis of confidence
"In the autumn of 1929 the mightiest of Americans were, for a brief time, revealed as human beings. Like most humans, most of the time, they did some very foolish things. On the whole, the greater the earlier reputation for omniscience, the more serene the previous idiocy, the greater the foolishness now exposed. Things that in other times were concealed by a heavy façade of dignity now stood exposed, for the panic suddenly, almost obscenely, snatched this façade away. We are seldom vouchsafed a glance behind this barrier; in our society the counterpart of the Kremlin walls is the thickly stuffed shirt… I have never adhered to the view that Wall Street is uniquely evil, just as I have never found it possible to accept with complete confidence the view, rather more palatable in sound financial circles, that it is uniquely wise."
John Kenneth Galbraith
The Great Crash
Houghton Mifflin (1954)
must-reading from institutional risk analytics.
the demise of the GSEs and now the monoline investment banks, those dealers not affiliated with a commercial bank, may be considered the appetizer and soup courses of this dismal meal. The main event now approaches, namely how Washington will deal with the impending illiquidity of some of the nation's largest depositories.
Does anybody really believe that the market for Treasury and agency debt would survive the collapse of a major bank or another primary dealer? Let us not forget that AIG is a primary dealer.
We interpret the changes in traffic patterns on the IRA web site as growing evidence of a slowly but steadily building retail bank panic. Older Americans particularly are running scared, pulling funds out of still solvent and safe institutions for fear of losing their retirement nest eggs. ... Keep in mind that IRA has no advertising other than our comments and media appearances, yet we are selling dozens of our IRA Bank Reports every day. Two months ago, we did not have any retail customers. Today we have several thousand retail users of The IRA Bank Report.
the IRA's recommendations are wholesale and probably necessary -- loudly overcapitalize the FDIC, get congress to authorize recapitalizing banks directly from the treasury, and get about clearing a path for private capital to flow to distressed banks. as they note very correctly:
The calculus that must be weighed is how much damage will be done to all banks, solvent or not, should the government refuse to act due to some illusory belief that we are a pure free-market economy. ... Unless the US authorities move quickly to stem the tide of fear and worry that we see manifest in the growing number or retail users of The IRA Bank Reports system, we believe that the US could be facing a full-blown banking crisis before the end of the year - indeed before Election Day.
the unasked question, however, is whether or not the united states government could experience a financing crisis in the aftermath of such a large bailout.