is it time to panic?
It’s hard not feel a little panicky when looking at the headlines from Wall Street. Even if the current financial woes on Wall Street (goodbye Lehman and Merril Lynch!) do not lead to additional bankruptcies and bail-outs, certainly a great deal of damage has been done to the institutional reputation of the U.S. financial infrastructure. Even the old-timers are astounded. (“’My goodness. I’ve been in the business 35 years, and these are the most extraordinary events I’ve ever seen,’” said Peter G. Peterson, co-founder of the private equity firm the Blackstone Group.”) Here are just a few quotes about the situation from the academic blogosphere:
Thanks goodness we bailed out Bear Stearns back in March if we hadn’t we might have lost Fannie Mae and Freddie Mac, Lehman Brothers, Merrill Lynch and who knows what else. Oh wait… – Alex Tabarrok
The big issue, going forward, is how the events of this year reshape our regulatory system. In a decade, will we look back on Bear Stearns, Frannie, and Lehman — oh, and have you been paying attention to the problems at WaMu? — in the same way that we look back on Enron?
My guess: no. Enron will be too modest an analog. By the time the dust settles, the New Deal will seem the more apt comparison. – Gordon Smith
This is not a market collapse, in the sense of a price drop in the stock market. It is an institutional collapse because of a price drop….This is an institutional collapse, in that we should expect to see a number of institutions falter and then either get bailed out by the federal government, “bailed in” by a consortium of other firms (who would guarantee credit, take on some assets, or both), or bought out. Some of these firms seem like they cannot fail. But they will. We’re talking about JP Morgan, Goldman Sachs, Morgan Stanley. Effectively, all the independent broker-dealers are potentially on the block. – Peter Levin
The defenses set up to prevent a return of those bank runs, mainly deposit insurance and access to credit lines with the Federal Reserve, only protect the guys in the marble buildings, who aren’t at the heart of the current crisis. That creates the real possibility that 2008 could be 1931 revisited. – Paul Krugman
And if you think these are just the perspectives of ivory tower pessimists, just listen to what the people who actually work on Wall Street are saying. (“It’s clear we’re one step away from a financial meltdown…”) Yikes, this isn’t comforting.