Sardanapale

Posted on Friday 18 September 2009

Survival of the unfittest

A year on from the collapse of Lehman Brothers, everyone is giving their two cents’ worth on the crisis. I might as well too. (At a time when expertise needs as much deflating as financial assets, perhaps I should value my own opinion at just one cent.)

The analysis I found most convincing – and, strangely enough, the one that agrees most with my skepticism about state intervention – was Kenneth’s Rogoff’s.

Rogoff has been making the rounds of TV shows with a new book he co-authored: This Time is Different: Eight Centuries of Financial Folly.

In this post he challenges the prevailing view that it was a big mistake to allow Lehman to fail, and that by doing so then-Treasury Secretary Hank Paulson turned a local storm into a global tsunami.

The problem, Rogoff says, was not just with one bank. Most of Wall Street had used borrowed money to make huge bets on assets whose value was shrinking.

America was going through the tail end of a classic cycle of financial folly and panic.

Whether or not Lehman was allowed to fail, Rogoff contends, many of the big institutions that were later bailed out would have needed to be sooner or later.

Lehman’s fall, it is true, did spread panic and pain. But in a deflating bubble, failures are not only unavoidable, but healthy. How else are you going to restore finance to health if don’t allow purges?

Rogoff believe that the eventual decision to rescue all and sundry was a terrible call. The government guarantee implicit in the decades-long policy of “too big to fail” had encouraged risk-taking in the first place.

As the time-horored saying goes, the greed that drives markets has to be tempered by fear. The state’s decision to underwrite the whole system while keeping it in private hands entrenches such a “heads-I-win-tails-you-lose” culture.

Removing the possibility of failure, in the words of Gordon Gekko in the great movie Wall Street, leads to the “survival of the unfittest”.

What is to be done? In the absence of a market solution, banks should be forced to set more reserves aside, and told they are mortal. Provisions to wind them down should be made clear. The public guarantees they depend on should in due course be scrapped.

In the same spririt, I also recommend this Econtalk podcast with Allan Meltzer from February.

La Fontaine 2009

La cigale, ayant chanté
Tout l’été,
Et parié trente fois le stock de sa boutique
Pour des opérations de finance exotique,
Se trouva fort dépourvue
Quand la bise fut venue.

L’immobilier s’était effondré: pas de pot
Pour la cigale. On donnait peu cher de sa peau.
Elle alla crier famine
Chez la fourmi sa voisine,
La priant de lui prêter
Quelque cash pour subsister
Jusqu’à la saison nouvelle:

“Chère amie! Ah! C’est à se brûler la cervelle.
Mon entreprise est saine: allez-voir mon audit.
Depuis plus de 100 ans j’ai pignon sur Wall Street.
J’ai des fonds colossaux, et des bureaux à Londres!
Si vous ne m’aidez point, le système s’effondre.
Je vous paierai, foi d’animal,
Intérêt et principal.”

La fourmi n’est pas prêteuse:
C’est là son moindre défaut.
“Que faisiez-vous au temps chaud?”
Dit-elle à cette emprunteuse.
“Nuit et jour, à qui mieux mieux,
J’achetais, ne vous défrise.”

“Je vois je résultat, et il n’est pas glorieux.
Vous aviez tout prévu, sauf un début de crise.
Vous vous êtes fourrée en de bien jolis draps.
Et en plus vous vendiez des credit-default swaps!
Vos avoirs sont plombés: on ne peut rien y faire.
Ne comptez pas sur moi pour vous tirer d’affaire.”

Et la cigale chut. Sa faillite affola
La troupe cicadienne, et bien même au-delà.
Le crédit stoppa net: on ne prêtait que dalle,
Car un peu tout le monde avait été cigale.

C’est alors que l’État survint à grands galops
“Les financiers,” dit-il, “sont tous de beaux salauds
Mais s’agit d’abord de sauver la finance
Renflouons chacun d’eux, rachetons sa créance.
Le titre le plus glauque on va le payer cash
Et au prix fort! Cela limitera le krach.”

Ces mots inespérés ravissent les cigales
On danse, on chante, on boit – agapes sans égales –
Et l’on se congratule à grands coups de boni
On fait des bras d’honneur à la triste fourmi.
“Et la moralité,” dit-elle, “de la fable?”
“Moi qui fus prévoyante et prudente et solvable,
Je me demande à quoi m’ont servi ces vertus!”
Et la fourmi jura qu’on ne l’y prendrait plus.

Sardanapale @ 10:11 am
Filed under: Economy and trade

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