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Required Reading: About the Situation on Wall Street

1:52 PM, Sep 16, 2008 • By DEAN BARNETT
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From the Politico, "As Markets Reel, The Blame Game Begins" by Jeanne Cummings

First, let's start with this little passage that hits Washington right where it lives:

We have to pity the government in a lot of ways," says Robert F. Bruner, dean of the Darden School of Business at the University of Virginia. "Wall Street innovates so rapidly, it's difficult for government to keep up."

Asked what Washington should have done, one industry insider said: "Nothing. Unless they're going to start telling firms how to invest. Government can do that in China. It can't do it here."

Impotent and stupid - that's the Washington I know!

It is a sad fact of life that the smart kids will choose to go to Wall Street and pull down seven figures a year rather than to Washington to serve as a regulator. Such are the curses of a free market economy. Of course, the senate is chock full of smart kids like Chuck Schumer, Chris Dodd and Barack Obama. But they can't keep up with the smart Wall Street guys when they have so many unkissed babies to tend to. What's more, certain malign presences in our economy like Fannie Mae and Freddie Mac found many Democratic congressmen to be spectacularly cheap dates. The fact that that these entities could purchase Chris Dodd's affection for six figures is a steal bigger than the Louisiana Purchase.

With Washington looking to point fingers in regards to the fall of Lehman, it's worth recounting the chain of events that led us to today (or rather Sunday):

1) Alan Greenspan's Fed made loads of cheap money available.

2) Money will be put to use. It does not wind up in enormous mattresses gathering dust. After all the smart uses were exhausted, Wall Street began looking to dumbers uses, or riskier uses if you will. Foremost among these riskier uses was issuing subprime mortgages.

3) The availability of subprime mortgages had two immediate effects. First, it created a whole new class of potential homeowners. As this new class of homeowners drove demand through the roof, the value of your house (and mine) increased dramatically.

4) Unfortunately for everyone involved, a lot of these people defaulted on their subprime loans. Thus, the subprime mortgage market disappeared while foreclosed homes glutted the housing market. That meant a sharp decline in demand and a sharp increase in supply hit the housing market simultaneously, making the value of your house (and mine) decrease dramatically. In terms of where this crisis hits the typical American, this item is the bogey. The typical American lost a huge chunk of his net worth thanks to the housing crisis, and it won't fully bounce back until…well, nobody knows when.

5) The erstwhile homeowners who took out loans they couldn't afford lost their homes and faced financial ruin. The firms who issued subprime loans and the firms who purchased subprime mortgage backed securities that the erstwhile homeowners couldn't make good on also faced financial ruin.

So what can the government and its various agencies do in such a situation? Fannie and Freddie had to be saved - "too big to fail" was right, and that's what made the shenanigans of those quasi-governmental agencies so scandalous. But Lehman? Life and the economy will go one.

Fed Governors will study for years the original Greenspan sins that set this course of events in motion. Meanwhile, Greenpsan will probably be taking to the airwaves to defend his tattered legacy. As far as the subprime lending industry that proximately triggered the crisis, theoretically the government in the future could set up a regulatory regime that puts mortgages out of reach for certain risky home buyers. Happily, I bet that idea sounds as noxious to liberals as it does to conservatives.

So government and politicians can only do what they do best - blindly cast blame on a matter that they don't fully understand. Let's not forget we have two presidential candidates who have spent a combined fifteen minutes in the private sector. I would love to see Charlie Gibson have a few minutes on camera with Barack Obama and ask in his impatient schoolmarm way, "Exactly what did Lehman Brothers do on a day in/day out basis?" I would expect an irrelevant homily on the virtues of "Main Street" as opposed to "Wall Street" in response.

In a free market, good decisions will be rewarded and poor decisions will be punished. That happens at the individual level when a person takes a mortgage that they can't afford. And it happens at a bigger level when a company like Lehman pursues an "aggressive" strategy that ultimately proves imprudent.

What makes me laugh - ruefully, I assure you - is when our office seekers trot around the country promising "accountability" for Wall Street. Lehman just went bankrupt - in a market economy, things don't get more "accountable" than that.

What everyone wants to know is how serious the current situation is. Step back from the ledge, and for goodness sakes ignore Senator Obama's ignorant hysterics. What we have now is a market correction. Firms that made poor decisions are being devoured by the market's unforgiving nature. Today the Dow is steady, the American economy having easily withstood the shock of the weekend's events. Most salubriously, the moral hazard that the government sponsored with past bailouts and craven enabling (see Fannie and Freddie) is now a memory. In evaluating future risks, finance houses will no longer consider the moving target of federal intervention if/when things don't work out.

The weekend's events were terrible news for Lehman's employees not to mention the countless vendors who depended on the firm. The bad news also extends to New York City, which will have the burden of a moribund financial sector to lug around for the foreseeable future. It stinks that things work out this way sometimes. But so it goes in a free market economy.