

The financial crisis

What next?


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I think the economist has bought into the whole line of arguments put forwards by investment banks over the last decade or so. Just see the way they treat whatever an investment bank employee has to say with such reverence. eg. the recent article on the AIG bailout (JP Morgan is feted there). Just because Goldman Sachs comes out with the BRIC theory for its clients, The Economist touts it as gospel for the world economy as a whole. This is what the true meaning of the leader article titled "what next?" really is all about. The demi-gods have proved to be false idols. The Economist doesn't know what to do now. Investment banks should NEVER dictate how to run ANY country'e economy. They are just middle men.


"Do not forget" the benefits of financial capitalism, The Economist urges. I think that is good advice that may well be ignored in the next administration--perhaps more likely if we have one party rule with the Democrats, but never mind that for a moment. As necessary as the steps of the last two weeks may have been, I fear that the prevailing mood of the country will turn against "Reagan-style" capitalism, and we will move toward permanent government ownership of more and more industries (automobiles next?) with higher taxation deemed necessary to support them. Whither private initiative then? Government programs don't die.

John Freeman

I'm disappointed to see the Economist echoing the same socialist tripe I keep hearing from all the empty heads on TV: that some companies are too big to fail. What a load of crap. How can we say we have free markets with a policy of corporate welfare like that? No one is too big to fail, and once we learn that, we will see less reckless behavior from the large companies.

Marge Innal Glory

Perhaps: capitalists loopholes simple minded Government philosophy hubris = nowI've been a bit edgy ever since school when they explained to us that checks and balances were now in place that the (US) Great Depression could never happen again. It was all about solving the details of known (past) problems. The danger with sharks and mountain lions and crises are that it is the one you don't see coming that gets you.Recommended read: Nassim Nicholas TalebHe's not in the top 60 results in an Amazon book search for "risk" which is a crying shame, because we should have known.


It is normal when a bubble bursts, that the cost is 10%to 16% of GDP. Ask the IMF. The GDP of the USA is the largest. Over a 5 to 10 year recovery period the authorities have to cover the huge loss of capital and wait until asset values recover. They will.Banks will survive as they have primary deposits and lend for normal purposes. Investment banks who invent asset packages, without knowing their customers, and fund from wholesale markets, will be wiped out. What is new? Do not buy snake oil, my friends. Good old Lloyds Bank is healthier than rattlesnakes Lehman and Merrill. Plus ca cahnge plus c'est la meme chose. I bet that the regulators will not avoid the next cycle either.They see only the solvency ratios, the CAMEL, but not the quality of the business.

curious mind

to Machiavelli999:yes, aware that globalisation has occured. Nonetheless, take the Austrian economy - it isn't doing too badly (esp in comparison with most other European countries). No Austrian bank was directly exposed to Lehman collapse (all making their profits in Eastern Europe). And the housing market didn't overheat either.Hence, it seems to me there is no automatism that means any European country has to suffer as much as Ireland or Spain because of troubles in the US. Not so naive as to think you will get away unaffected when the world's largest economy is in such troubles.


This article suffers from the wrong perspective. The greatest failure has not been in economics, but in the dealing of justice, the American system of which is asleep in the crow’s nest. Even a cursory look at the goings-on in these financial institutions will reveal an obvious enough fact: fat cats playing around with other people’s money and taking highly absurd risks to promote their own gain and position, only to retire to their golden Xanadus when the debt hits the fan and while the common folk hit the bread lines. Some of those responsible for this chaos should be in jail for fraud. (How many are there behind bars?) Only then can you say goodbye to financial instability and moral hazard.


curious mind,Since US's economy is the largest in the world, the world depends on it. The demand from the US consumer has driven the world's economy for the past decade.As to your other questions, I am not sure what their exact plans are, but in theory it goes along the lines of simplifying huge behemoths like Fannie, Freddie and AIG and eventually spinning them off as smaller private entities when times improve. I know that the former CEO of Allstate insurance has been made AIG's new CEO. His motto is "simpler is better".Finally, to your question about why aren't the Fed's liquidity injections having any positive effects, I would argue that they are. The horrible scene we are watching unravel could be even more horrible.


I strongly agree with Machiavelli999. Central bankers don't consider asset prices in theor inflation calculations, however inevitably higher asset prices will bleed into the CPI. I think Greenspan left interest rates way too low for too long. The US has only managed to put off the hard recession that should have occurred after the dot com crash. Now we will take our medicine. However, unlike the Japanese and other countries with socialistic tendancies the US will take its medicine, clean up its act and move forward. Near term it will be ugly, but long term I'm bullish on America.


When Hank Greenberg was forced to resign from AIG some 2 years ago, why didn't the authorities climb all over the insurer to see what the potential liabilities might be? It may be that they were too large at that stage to dilute. But surely the Fed should have been aware of the risks at such an important institution and quietly funded it to a far smaller tune than it has had to this week.

curious mind

to Machiavelli999: I agree with you, but the Europeans didn't go along with Greenspan's policy and are nonetheless in big trouble (not only in the UK). This doesn't explain the troubles in the Spanish, Irish or the Japanese economy.

curious mind

there are a few more questions popping up in my mind:what's the plan of the US government after obtaining ownership? yes, it may have been necessary (future will tell if their decisions regarding Bear Stearns, Fanny Freddie, Lehman and AIG were good decisions), but what now?how long is it planning to keep 80% of AIG? what if the company isn't recovering from recent turmoils all too quickly (with all that frenzy in the market this doesn't seem unlikely)?how is it supposed to quickly acquire the knowledge of financiers so that it can live up to the duties of the company owner (rather than being the authority which has oversight - a task far more suitable to any government)?And a last crucial point:what options are we left with to improve the situation when the billions of US$ the FED, the European Central Bank, the Japanese Central Bank and others made available seems to have (almost) no positive impact?


I put the blame for this crisis at the feet of Greenspan. His kept interest rates too low for too long which created an asset price bubble that he did not recognize as a problem. I don't think any amount of regulation could have prevented the effects of this wrong headed monetary policy.


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