Struggling to restore faith in the system
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WITH WALL STREET starting to suffer the jolts that would plunge the country into the Great Depression, Richard Whitney, acting president of the New York Stock Exchange, strode onto the trading floor on the afternoon of Thursday, Oct. 24, 1929.
Some were expecting he would close the exchange. Instead, he bought 10,000 shares of
Made on behalf of a group of bankers, Whitney's dramatic gesture was aimed at calming worries about the nation's financial system. But though it blunted that day's downturn, the tumultuous losses of Black Monday and Black Tuesday followed the next week. (As for Whitney himself, he would later serve three years in Sing Sing for embezzlement.)
This week, the country's governmental officials and financial sector titans are again struggling to restore faith in the financial system and stave off a panic - and it's clear they too are flying by the seat of their pants.
Let's hope they have better luck than Richard Whitney.
Over the weekend, we saw an unprecedented rearranging of the US financial landscape, as companies that have long been household names disappeared altogether or were forced into sale. After 158 years,
The whole thing is reminiscent of a massive power outage that starts when an electrical surge in one part of the system pulses through the grid, burning out transformers and substations and leaving untold damage in unexpected places. Except here, the problem isn't a surplus of current, but a lack of cash, and rather than occurring in an instant, it's happening in slow motion.
In a longer perspective, the cause of the crisis is rampant risk-taking and sharp practice, made possible by insufficient regulation. That speculation, aided by the massive securitization of mortgages, led to the housing bubble, a bubble whose rising values made possible the private borrowing binge that boosted the economy through the mid-2000s.
Now that bubble has burst and the effects are reverberating through the financial system.
"What we are seeing is a speculative market consuming itself," says James Galbraith, an economist at the Lyndon B. Johnson School of Public Affairs at the University of Texas. Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson have struggled manfully to contain the crisis. Still, two things are clear here.
First: The two are essentially making it up as they go, Bernanke finding imaginative ways to pump liquidity into the markets, Paulson presiding over shotgun Wall Street marriages. As they do, the two are torn between the practical need to stabilize key parts of the financial system and the principle that they shouldn't use taxpayer money to insulate big institutions from the consequences of their own foolishness.
Thus in March, the Fed extended a $30 billion line of credit that helped JPMorgan Chase buy Bear Stearns at a fire-sale price, and by taking over Fannie and Freddie, the government has vastly expanded its role as a guarantor of mortgages. On the other hand, less essential Lehman Brothers was left to sink in the mortgage-crisis quicksand. But these judgments are as much sorcery as science.
Second: There's a good deal of whistling past the graveyard to official reassurances about the resilience of the overall system. As this weekend's developments made clear, the mortgage crisis isn't behind us. Indeed, as Paulson conceded in a Monday press briefing, problems will persist until most of the housing correction is behind us.
The treasury secretary praised financial sector leaders for their cooperation in the crisis. Still, there's one more take-away here that shouldn't be missed.
As Galbraith puts it: "We are going to have to have a much more cautious and responsible financial system if we are going to restore viability after this mess. Wall Street cannot run the country - that is the message here."
Scot Lehigh can be reached at lehigh@globe.com.
