September 18, 2008

A tangled web we weave

Though I have been following the spin-out in the financial markets, I do not necessarily understand all the reasons why we landed in this mess (very few do.) (It is easy to blame the rather amorphous and omni-present "greed" or if you have leftist/socialist leanings, you can blame "capitalism" and "free markets" itself!)

However, it is scary to think that even the so-called experts and the men in charge at the Treasury and the Federal Reserve, let alone politicians who can give us only rhetoric, arguably have no idea how to prevent such a disaster from happening again. I say that based on this excerpt from a NYT article:

“I fear the government has passed the point of no return,” said Ron Chernow, a leading American financial historian. “We have the irony of a free-market administration doing things that the most liberal Democratic administration would never have been doing in its wildest dreams.”
..
“It’s pure crisis management,” Mr. Chernow said. “It’s the Treasury and the Federal Reserve lurching from crisis to crisis without a clear statement on how financial failures will be handled in the future. They’re afraid to articulate such a policy. The safety net they are spreading seems to widen every day with no end in sight.”
Of course, we need to get out of the current mess before we worry about how to avoid it again!

It is scary when the predictions of even the most pessimistic of guys - Nouriel Roubini, economics professor at NYU's Stern School - who was dubbed "Dr. Doom" recently in the NYT, come true, no?


The broker/dealer business model is "inherently unstable" and the four remaining major firms will not be independent in a few years, says Nouriel Roubini, economics professor at NYU's Stern School and chairman of RGE Monitor. Embattled Lehman Brothers is likely to seek a buyer "within months," Roubini says. Lehman Brothers ceasing to be independent is not such a shocking outcome, but Roubini ultimately sees a similar outcome for Goldman, Merrill Lynch, and Morgan Stanley. - via (link has video interview with him)

This article in Business Week says "he predicted back in February that one or two major broker dealers would go bankrupt and now believes all of them will eventually disappear."


"If Lehman does not find a buyer over the weekend and the counterparties of Lehman withdraw their credit lines on Sept. 15 (as they all will in the absence of a deal) you will have not only a collapse of Lehman but also the beginning of a run on the other independent broker dealers (Merrill Lynch first but also in sequence Goldman Sachs and Morgan Stanley and possibly even those broker dealers that are part of a larger commercial bank, i.e. JPMorgan and Citigroup.)," Roubini wrote on Sept. 13 in his blog, Nouriel Roubini's Global EconoMonitor. " Then this run would lead to a massive systemic meltdown of the financial system."

Oh what a tangled web we weave!

--
"Oh what a tangled web we weave,
When first we practice to deceive
"
- Sir Walter Scott

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