May You Live In Interesting Times

My thoughts on the financial meltdown:

• What treasury and the fed have done is probably necessary. Prudence dictates that we swallow our principles and make sure that the crisis ends, or at least moderates.


• Thank god for Hank Paulson. The fate of the world now rests in the hands of fewer than 200 individuals. That's a position you don't want to be in very often. When you are, it's essential that the leadership of that group is supremely competent. So far, Paulson seems to be filling the bill. We'll know more in a few months.


• I don't understand being this draconian on shorts. Seems like reinstating the uptick rule would have been adequate and had fewer second-order effects. Perhaps Paulson and Cox didn't have the time to be certain that a decimalized version of the rule would be effective and chose the short moratorium as a more certain remedy.
  


• There's plenty of bipartisan blame for the unintended consequence of encouraging people who really couldn't afford mortgages to get them. However, the blame for being asleep at the regulatory switch rests squarely with the Bush Administration and, to a lesser extent, with a Republican-dominated Congress. The consequences of doing away with the uptick rule on short selling, the failure to understand--to say nothing of regulate--these exotic derivatives, the failure to monitor the ratings institutions, and the lax enforcement of existing regulations, and, last but hardly least, the undeniable fact that the winners in this debacle are few, insanely rich, and on questionable moral ground can and should be laid at the feet of the GOP. I cringe at the upcoming overreaction, but it's going to be hard to say that it won't be better than the alternative of doing nothing.


• We have just witnessed the creation of a US sovereign wealth fund. Right now it's a fund with really crappy assets. That won't always be true. I think that there's a reasonable but ultimately very scary case to be made that we've accidentally created a precedent that will evolve into the principal mechanism to finance government in the future. This makes the GOP proposals to privatize 5% of Social Security look like nothing. The consequences of letting the government buy distressed assets and the incentives therefore to allow assets to become distressed is very troubling. The consequences of so directly tying the governments finances to the fortunes of the market as a whole are even more troubling.


• I worry that we may have pushed the federal debt situation over the edge. The next economic crisis won't be reacting to a sudden deflation, it will be dealing with systemic inflation to finance the debt. The United States of America is a much weaker country today than it was a week ago. Rehabilitating it will be a slow, painful process that will be accomplished by a very different country than the one we have today.


• My principal objection to Obama--that he and a Democratic Congress would run unchecked--has largely been eliminated. There simply isn't enough money left for them to be as stupid as they'd like to be. Having said that, I think that McCain's proposals this morning were more specific than Obama's and were barking up the right set of trees. The transparency proposals were very refreshing.

We've all been reminded of why "may you live in interesting times" is a curse. I wish you all good luck in the coming months. We're going to need it.