A River in Egypt? Or Manhattan? Or a Town Near You?

Tue, 16 Sep 2008 11:15:21 +0000

Are we in denial? Joe Nocera makes the case persuasively in today's New York Times:

Last week, it was Fannie Mae and Freddie Mac that needed a government bailout. This week, it looks as though American International Group and Washington Mutual will be on the hot seat. We have actually reached the point where there are now only two independent investment banks left: Goldman Sachs and Morgan Stanley. It boggles the mind.

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But it really shouldn’t. Because after you get past the mind-numbing complexity of the derivatives that are at the heart of the current crisis, what’s going on is something we are all familiar with: denial.

Indeed, it is not all that different from what is going on in neighborhoods all over the country. Just as homeowners took out big loans and stretched themselves on the assumption that their chief asset — their home — could only go up, so did Wall Street firms borrow tens of billions of dollars to make subprime mortgage bets on the assumption that they were a sure thing.

What would boggle the mind is if the taxpayer would be called upon to pay for the cleanup of this mess. Ex post transfers from the prudent to the imprudent is no way to "promote the general welfare." Come to think of it, neither is hidden leverage and deferred maintenance. I'm glad we've got a Treasury Secretary who likes working weekends.