Frontline Goes » Inside the Economic Meltdown

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Frontline is my favorite TV show. I like the way they take the viewer inside places we'd normally never be permitted. (Deep inside.) And I like their understated narrator » Will Lyman.

Hank Paulson: Secretary of the Treasury who presided over the economic meltdown of 2008

Yesterday they released a documentary titled » Inside the Meltdown. One of the most hair-raising programs I've seen.

Many smart people (and very highly-paid, too) were so enchanted by the glitter that they apparently failed to notice they were undermining the foundations of our economy. (Or maybe they did notice, but didn't care.)

Sad. Tragic. Disturbing.

Speaks volumes about certain parts of our culture and its priorities .. where profit-n-loss usurp right-n-wrong .. and even common sense gets shoved aside .. when there's money to be made. These people give capitalism a bad name.

It wasn't like nobody saw this coming, or didn't try to stop it. The Chairman of the FDIC, Sheila Bair, was one of those waving a red flag far back as 2001 regarding a potential crisis in the subprime market. (That had to be a frustrating experience.)

If you play the video-excerpt posted on THIS page, you'll hear Sheila say (in her own words):

"For years there were bills in congress to try to address 'predatory lending'. They just couldn't get the political momentum to get anything done. And I think that's because everybody was making money. It's very difficult to get the political will in Washington to move when everybody is making a profit."

On THIS page, we read reports of Bernanke telling members of Congress things like, "After today, we won't even discuss the Great Depression, because this is much worse. Nothing like this has ever happened before."

The new term we learn is » moral hazard (or lack thereof) .. tho I don't see how 'morals' has anything to do with it.

The big day came on Monday September 29, 2008, when the Dow plunged 777 points, its biggest-ever single-day drop .. shortly after the government (suffering from bail-out fatigue) let Lehman Bros fail.

Watch the remarkable hour-long special » HERE. What a picture it paints of how close to the edge we live, and the condition of our (fracturing) economic foundations.

••• today's entry continues here below •••

Absent the recent (unprecedented) level of government intervention, which includes actions such as the nationalizaton of Fannie Mae & Freddie Mac (which is all based on debt, btw), our economy would be flushed down the toilet. It was like watching a horror flick, only real.

The question we're left with » will everything the government has done be enough? The answer » nobody knows. (It's that bad.)

The whole situation reeks of incompetence .. layers of incompetence. (Or worse.) Ever get the feeling the foxes are guarding the henhouse? By 'foxes' I mean people who are too clever for their own good and who possess less-than-honorable intentions. It certainly seems that way when we give incredible sums of money to the very institutions who got us into this mess in the first place.

I mean, if our economic leaders are so smart, and they know so much about the financial world, and financial instruments, and how economies operate .. then how come ...?

Are they ashamed or embarrassed that this economic mess (of historic proportions) occurred on their watch? .. or that they lacked the insight (or foresight) to anticipate the impending economic collapse?? .. even after others had been waving red flags for years??? Doesn't instill much faith in the wisdom or insight of our economic or political leaders, does it?

Seems unlikely that people sitting in board rooms in both New York & Washington (where these decisons were being made at the very highest levels) did not understand what they were doing. Every decision has a risk/reward structure. Even those most basic, such as » "Should I cross the street now, or wait 'til the bus goes by?"

So I tend to believe they were more ruthless than stupid .. especially since they were so close to the action, and poised to profit. We've all sat in meetings where (some kind of) policy decisions are made. So I'm convinced they had a good grasp of the risks, weighed them against the potential rewards, and made their decisons understanding both. (It's scarier for me to think the people running our economy & government were just plain stupid or reckless.)

Whose job is it, anyway, to ensure these kinds of problems don't happen? (Can anyone tell me?) Is there no one with the honor to take responsibility and fall on their professional sword? I would like to see somebody with the huevos to stand up and declare, "It's my job to ensure that something like this never happens again."

While I'm on the subject of posing questions related to our economy .. why isn't Madoff in jail? The money he used to post bail was gotten illegally, and could be used to reimburse those he defrauded (which he already admitted). Many who have committed crimes far less detrimental are sitting in jail right now. He's sitting in his luxury home, which was paid for with money he Made-Off with (illegally).

The feeling I got from watching this documentary is the prevaling mind-set on Wall Street is » it's all about turning a profit .. at any cost .. cuz that's ALL that matter$ .. even if that means running the US economy into the ground. So be it. And that » it's never enough. (Even if you make billion$.)

Regarding things pertaining to the economy, there's a great video series titled » Commanding Heights, which you can also view online. Last year, I checked out this 3-DVD series from my local public library. Subtitled "The Battle for the World Economy". Unlike anything else you've seen.

For more along these lines, here's a Google search preconfigured for the query » subprime mortgage economic paulson bernanke lehman bail federal wall dow

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I can't comment on the documentary since I can't view it (or even get a transcript), but it's clear from what I can read (transcripts of an NPR interview with the director) that it doesn't even touch peripherally on the causes of the meltdown, which means it's hard to rate it as worth watching.

Instead, a read of the 1841 book "Extraordinary Popular Delusions and the Madness of Crowds" (which I heartily recommend) strikes me as rather more germane, especially since the US credit bubble was being stoked not just by "bad" investment bankers seeking yield (in the face of the Great Moderation, which you should also read about) but was enthusiastically supported at all levels of society.

> or that they lacked the insight (or foresight) to anticipate the impending economic collapse??

As I have pointed out before, some form of large event was very widely anticipated[*]; as a regular reader of _The Economist_ I can attest to that. But then, the insolvency of the US Social Security system is also widely known about, and what is being done about that? Nothing. Nada. Squat.

The political gridlock in the US (by which I mean both the entrenched party positions in the house and senate, as well as the polarization of media and the apallingly low quality of public policy debate in election years) makes good public policy incredibly difficult to form and apply even in the best of times, even when everyone can see clearly the lights of the onrushing train.

[*] The consensus view of that, incidentally, was that the US currency would likely tank as the foreign capital financing the U.S. trade and current-account deficits would start to leave, as part of the necessary unwinding of the global imbalances. In the event, the reverse has been happening as foreign capital is still flowing into US treasury bonds, but it's worth remembering that the current deflationary environment was immediately preceded by one in which the most visible danger signs were of a long period of 1970's-style "stagflation", not rapid deleveraging and the risk of a deflationary spiral.


Incidentally, it's still worth bearing in mind just how relatively wealthy the middle classes in OECD countries are compared to previous generations. Great graph, for you in the US:[]=1790&endP[]=2007&US[]=GDPCP and view the resulting graph in both regular and log forms; the log graph in particular puts both the undershoot of the Great Depression and the overshoot of WWII into context, the regular plot shows dramatically just how (relatively) wealthy the median person in the US is compared to their parent's generation.

Good to hear from you, Nigel. We miss you at the forums. Been receiving lots of mail from folks asking, "what happened to Nigel?"

I wonder why you can't see/view the video. I would think it's available to all with an internet connection. Is this not the case? What kind of message/error do you get?

I'm no economist. Even have trouble reading the Economist. So I appreciate your informed comment.

The video thing is just because it's only available in Flash (in low-rez eyestrain-o-vision) and it won't play here without massive stuttering. The pipes across the Pacific mean lower bandwidth and higher latency than their applet can tolerate. A higher-rez AVI I can suck down over time is what I need, so I'll wait until they post a transcript.


An intro to the Great Moderation is which provides an accessible explanation of this article

While some of the "new economy" stuff talked about before the .com crash was nuts, the Great Moderation was real and did pose a real policy conundrum for central bankers. In particular, it left them scratching their heads about a phenomenon called the inverted yield curve; normally, it's a leading indicator of recession but the US had been steaming along with an inverted yield curve for an amazingly long time; see for some of the confusion about how to interpret all that.

Journalists can point back with hindsight and they and populist politicians can wag their fingers all they like, but the factors that got us here didn't fit together that well with what anyone could see at the time (basically no-one back at the point any intervention was possible could have had all the data they needed to figure out what was happening).

The SEC not catching Madhoff was a screwup, for sure. But I'm inclined to be a little more generous about the intentions and ability of other financial regulators in respect of the subprime credit bubble and the consequent mess.


Final note; aside from the fact that most people in the OECD countries are, crunch or not, going to stay pretty wealthy by the standards of 30 years ago in our own countries, the last years have seen improvements in global living standards that are (Africa excepted, alas) striking:

Incidentally, there was a good interview this morning on Radio NZ's Nine to Noon program with Columbia economics professor Jagdish Bhagwati (who was a lively speaker, bet his classes are fun)

You can get the interview (which touches on a lot of policy issues, although primarily trade) from

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