More On the Sky Falling

I'm usually just working on small business, but yesterday, as I went over the Sunday New York Times, I hit upon one piece, by Ben Stein, that struck a cord. He called it You Don't Always Know When the Sky Will Fall.

After apologizing for not having foreseen the crash ...

I don't have any magical powers to foresee the future.

He goes on to highlight the "catastrophic mistake" ...

In this case, I did not foresee the catastrophic mistake, as I view it, by Treasury Secretary Henry M. Paulson, Jr. to allow Lehman Brothers to fail. That failure left a gaping hole in the financial services industry, and blew away confidence that the Feds knew what they were doing.

The solvency crisis exploded when, in mid-September, Mr. Paulson allowed Lehman Brothers to die a sudden death. I would never have believed that it could happen, which shows one of my many limitations as an economist and a human being. I assume that the future will be much like the past, but sometimes it isn't.

After Lehman, I felt sure that the government would realize its mistake and issue blanket solvency guarantees to banks. But that didn't happen, the stock market fell apart, credit went icy cold and the wheels started to come off the economy. This also took me by surprise.

Stein quotes economist Anna Jacobson Schwartz as noting that this is a solvency crisis. Banks had money, but didn't feel safe lending it.

In fact, bankers have had so many losses and faced so much uncertainty that they dared not lend, for fear of killing their banks with bad loans -- so we have actually had a solvency crisis.

He goes on to talk about the failure of debt rating services to accurately rate debt instruments, and then concludes (before a defense of big oil, which seems out of place to me) with the following:

This is perhaps the main lesson of this whole experience. It is basic but still unlearned: human beings must have savings. This is not just a good idea. It's the difference between life and death, terror and calm. So start saving right now, and don't stop until you die.

Comments

[vippy]

Most people cannot save - if the avg. American has an income of $ 32,000 then how are they going
to save. Everything keeps going up and up, from basic needs such as groceries, utilities, transportation, insurance, etc. that it already present a problem with priorities. Fact is the wages have
not kept up and now we seeing the effect on it. For instance, if the car insurance was more reasonable then more people would be able to purchase it and not having so many withoiut coverage
especially in Texas. Yet I see next year they will go up another 10%. Are we stupid yet?

[Pdubya]

yep. credit doesn't come from more credit. it comes from savings. and banks should be allowed to fail. why reward bad behavior? if there is to be a bailout, have these crooks restitute americans and pay us directly, then have them go to jail. and cut some goddamned federal spending!

[marijam]

How come they get to keep their jobs? There were people who predicted this. Why aren't they anchors on tv? Noted pundits? Whatever happened to "meritocracy"? Do they still merit their jobs? I don't think they do.

[HmblDog]

I hope Ben Stein and Larry Kudlow haven't personally lost any money in this market. That would be doubly unfortunate as they have been foremost among the cheerleaders for everything this administration has attempted.

[iheardthisbefore]

Here, here on your thoughts on the "cheerleaders"....however, I hope they lost as much
or more than I did.