Weekend Read – 6 Errors add to an Economic Crisis

I like weekend reading that is a little light and fresh with perspective. I want to learn something I didn’t know before without a lot effort. It is the weekend after all. Well, I ran across a good summation of the financial situation in the NY Times. It is in a piece by Alan Blinder called Six Errors on the Path to the Financial Crisis. Here are some excerpts:

WILD DERIVATIVES In 1998, when Brooksley E. Born, then chairwoman of the Commodity Futures Trading Commission,
sought to extend its regulatory reach into the derivatives world, top
officials of the Treasury Department, the Federal Reserve and the
Securities and Exchange Commission squelched the idea.

SKY-HIGH LEVERAGE The second error came in
2004, when the S.E.C. let securities firms raise their leverage
sharply. Before then, leverage of 12 to 1 was typical; afterward, it
shot up to more like 33 to 1.

A SUBPRIME SURGE The next error came in
stages, from 2004 to 2007, as subprime lending grew from a small corner
of the mortgage market into a large, dangerous one.

FIDDLING ON FORECLOSURES The government’s continuing failure to do anything large and serious to limit foreclosures is tragic.

LETTING LEHMAN GO The next whopper came in September, when Lehman Brothers, unlike Bear Stearns
before it, was allowed to fail. Perhaps it was a case of misjudgment by
officials who deemed Lehman neither too big nor too entangled — with
other financial institutions — to fail. Or perhaps they wanted to make
an offering to the moral-hazard gods. Regardless, everything fell apart
after Lehman. People in the market often say they can make money under any set of
rules, as long as they know what they are. Coming just six months after
Bear’s rescue, the Lehman decision tossed the presumed rule book out
the window.

TARP’S DETOUR The final major error is mismanagement of the Troubled Asset Relief Program, the $700 billion bailout fund. As I wrote here last month, decisions of Henry M. Paulson Jr., the former Treasury secretary, about using the TARP’s first $350 billion were an inconsistent mess.


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