|
Blog |
|
Libertiny Financial Personal Finance |
|
Why Anna Schwartz thinks that Ben Bernanke, Federal Reserve Chairman got the bailout wrong. 2008 October 20 © 2008, Libertiny Financial LLC
As a student of economic history, America’s Great Depression is fascinating. The parallels between today’s economy and the Great Depressions are unmistakable—at least the economic “bubble” portion and the easy and low-cost access to loans that drove the creation of the bubble. It all sounds very familiar to us today in the post-era of Alan Greenspan’s mumble mouthed mush.
Since Greenspan left the position of Chairman of the US Federal Reserve, the ramifications of his “irrational exuberance” are now upon us. And we now have Ben Bernanke in Greenspan’s position to guide us through our recession. One of the high hopes that we had with Bernanke was the fact that he too is a student of the Great Depression. And as it turns out, is very much in touch with Anna Schwartz.
Who is Anna Schwartz? A few vital statistics: 1) At her present age of 92, she lived through the Great Depression having been born in 1915. 2) She continues to work as an Economist at the National Bureau of Economic Research in New York City. An organization that she’s worked for since 1941. 3) In 1963, she co-authored the book “A Monetary History of the United States, 1867-1960” with Nobel laureate economist Milton Friedman. This book is considered to be one of the authoritative works on the cause of the Great Depression and the mistakes made by the politicians and regulators of the era that made the situation worse.
How does this relate to Ben Bernanke? Bernanke has stated that Anna Schwartz’ work was critical to his understanding of the Great Depression and how to avoid one in the future.
That’s why her recent interview in the Wall Street Journal is so interesting. In her own way, she describes why Bernanke has failed to understand the root cause of our present recession: It’s not a cash flow or liquidity issue, it’s the fact that finance institutions aren’t confident about their ability to get repaid when making a loan. Whether it’s another financial institute or you and me who are taking out the loan.
The underlying cause: The ridiculous investments that Wall Street financial institutions made and the leverage that they used to buy even more. How do you value something that has amazingly murky financial statements? As with the whole Enron question a few years ago: Why would anyone buy stock in or back a company when they don’t understand the business model and financial statements. This same issue of not understanding the financial statements and valuation of so called “toxic investments” didn’t bother Wall Street finance firms.
When you can’t put a value on an investment, it’s difficult to buy and sell these investments. That leads to difficulty in unloading the holdings, even at what may be a substantial discount. And since the financial firms are unable to unload these investments, their whole business model and balance sheet is called into question. Just as you and I would have difficulty in obtaining a loan if we weren’t able to prove where we would get the money to pay it off, no one wants to lend to a financial firm when they could literally collapse with a few days notice.
Anna Schwartz’ solution, and I completely agree: Let the poorly managed firms fail. Cut the toe off to save the leg.
To read the interview with Anna Schwartz in the Wall Street Journal, click on: http://online.wsj.com/article/SB122428279231046053.html
|
|
Buy |