Wednesday, March 11, 2009

Too Late To Cover Your Ass Now, Greenspan

It seems that former Federal Reserve Chair Alan Greenspan is trying to deny that he played a part in causing our current financial malestrom.

Give me a fucking break.

The evidence is becoming more and more clear that allowing Lehman Brothers to fail in September of 2008 didn't freeze credit markets. For an excellent and readable empirical approach, read John Taylor's paper on the government response to the crisis (if you don't want to read the whole thing, check out the charts and skip to the last page and read the conclusions).

For regular readers of COTL, you will remember my discussion of this matter last fall. If not (or if you just want to relive those, ahem, thrilling moments, click here and here.

The problem was not the failure of Lehman Brothers. The problem was the ad hoc and uncoordinated reaction of the government to the situation. Short-term cash injections were not enough. Why? The problem was NOT liquidity. The problem was risk.

By propping up some companies and not others, the government caused the (now) fatal crisis of confidence among investors that made making any investment in fixed-income markets too risky. This caused the drop in the bond markets and thus the drying up of credit.

If we are taking a break from dealing with this situation to point fingers, let's make sure they are pointed in the right direction.

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