11/27/2008 05:12 am ET Updated May 25, 2011

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.