Crisis on Wall Street

The financial crisis has deepened on Wall Street. Yesterday, Rory at IPE provided a great overview of what happened over the weekend. Here at Zeitgeist, we’re following the developments quite closely. Lacking a purely financial background, I don’t feel qualified to comment extensively on much of what’s going on. The news is changing hourly, and I recommend that you to check in often at the following blogs: Free Exchange; Felix Salmon; Calculated Risk; and Economist’s View, among others.

I’m on more comfortable ground in regards to the political-financial aspect, and I have a couple thoughts. First, kudos to Hank Paulson for drawing a line in the sand about public bailouts in regards to Lehman Brothers. Moral hazard is an underlying quality of all government-private sector financial interactions. Lehman has been slowly dying for months, and investors have had ample time to readjust. The Treasury has taken a risk that markets are robust enough to weather its failure. However, if Mr. Paulson had allowed another Bear Stearns, the floodgates of federal money would have been much more difficult to close in the future, and it hardly looks like Lehman will be the last financial institution to come knocking. Conversely, AIG might fail in the next day or two if the insurance firm is unable to secure additional credit lines and is possibly another story. Mark Thoma weighs both sides of a potential bailout of the insurance giant.

Clearly new regulation is needed. The key here is that better, not more, regulation is needed. As Mr. Paulson has stated, the financial regulatory structure is a patchwork, hopelessly outdated, and simply not up to the task of 21st century financial globalization. This is an extremely complicated policy arena, and I’m very nervous that Congress isn’t up to the task right now. Congress often likes to be seen as “doing something”, but in this situation, uninformed debate and ill-considered new regulatory legislation will make things worse. Everyone needs to be as careful, and as level-headed, as possible. Perhaps this is asking too much: it is an election year after all. But further to that, I strongly agree with Megan McArdle that this should not be a campaign issue. This would have happened just as easily under a Democratic president as a Republican one.

Finally, on the lighter side of things: Donald Luskin, who penned a snarky and bitterly partisan op-ed in Sunday’s Washington Post about how well the economy is doing, is now a strong favorite to win the award for WORST. TIMING. EVER.

(photo by HKmPUA)