Above the Fold: Down the Rabbit Hole

John Cassidy, Joe Nocera, and others trace our economic ruination

With this morning’s papers bringing news of the government’s newest commitment of tens of billions of dollars to prop up Citicorp—its third major lurch towards socialism in three months—one fundamental question remains: How the hell did we get here?

The freshest answers come from this week’s New Yorker, last week’s NOW (PBS), and, especially, Deborah Amos’s interview with Joe Nocera of The New York Times on Bill Moyers Journal (also PBS).

In The New Yorker, John Cassidy offers 12,000 words on the “Anatomy of A Meltdown” and Ben Bernanke’s central role in this ongoing catastrophe. Cassidy finds a consensus that the decision to allow Lehman Brothers to fail was the worst one Bernanke and Treasury Secretary Henry Paulson have made so far. French finance minister Christine Lagarde calls it a “horrendous” error, and Alan Blinder— “an old friend and former colleague of Bernanke’s in the economics department at Princeton”—says “after the fact, it is extremely clear that everything fell apart on the day Lehman went under.”

Bernanke, who didn’t hesitate to stretch federal law to help merge Bear Stearns into J.P Morgan or pump more than $100 billion into AIG, insists there was no legal basis for the government to rescue Lehman. To which Dean Baker, of the Center for Economic and Policy Research, retorts, “They’ve been doing things of dubious legal authority all year. Who would have sued them?”

Other highlights of Cassidy’s report:

- In the years preceding the current meltdown, Bernanke consistently argued that the Fed should “ignore bubbles and stick to its traditional policy of controlling inflation”—a position which Alan Greenspan agreed with.

- As late as 2004, Greenspan was still saying “a national housing bubble was unlikely.”

- In 2005, Bernanke argued that the global economy’s main source of imbalance was not excess spending at home—which has created gigantic trade deficits for decades—but rather “excess saving in China and other developing countries.”

- Also in 2005, Bernanke told the White House press corps “I think it is important to point out that house prices are being supported in very large part by very strong fundamentals.”

- In 2006, he rejected calls for direct regulation of hedge funds because that would “stifle innovation.”

- Stephen S. Roach, the chairman of Morgan Stanley Asia, says “It is unconscionable that the Fed didn’t really care about regulation, or didn’t show any interest in it.”

- At the beginning of 2007, Bernanke was still telling Congress that the housing downturn wasn’t “a major factor” in assessing the “state of the economy.”

- Bernanke tells Cassidy “the casual relationship between the housing problem and the broad financial system was very complex and difficult to predict.”

The worst news from Roach of Morgan Stanley: “with Lehman, the system effectively broke down. It is now on life support from the Fed, but it’s really touch and go whether they can hold it together…We may be on the verge of another collapse.”

WHILE CASSIDY SEEMED TO BE GIVING Bernanke something like a B-/C+ for his overall performance, over on Bill Moyers’s show on PBS, Joe Nocera was giving Hank Paulson an unqualified “F.”

Among Nocera’s sharpest judgements in an interview with the indispensable Deborah Amos:

- “He has destroyed confidence in the Treasury Department.”

- “The willingness of the federal government to let Lehman Brothers default in mid-September was the single worst mistake that it made.”

- “I think the headline this week is …’Government Throws in the Towel.’”

Then there is Paulson’s unconscionable refusal to attack the root of the whole problem–the spiraling expansion of home mortgage foreclosures, despite the pleas of everyone from Congressman Barney Frank to FDIC chairman Sheila Bair.

“It’s so hard to figure out,” said Nocera, reflecting the general bafflement over Paulson’s position:

Number one, as Barney Frank said, Mr. Secretary, it is explicit in the legislation that preventing foreclosures is one of the things this money is for, which he kind of keeps denying. Secondly, he makes this distinction between investing in the financial institutions, which he does call investing, and giving money to homeowners or doing something for homeowners, which he calls spending. In other words, he sees that as a government spending program. And he’s opposed to that. But if you don’t do something for homeowners, not only will it hurt the economy, it’ll hurt neighborhoods. It’ll hurt the next door neighbor. And by the way, it’ll go all the way up the chain of Wall Street and you’ll start to see the write offs all over again and the same problems all over again.

FINALLY, ON NOW, Maria Hinojosa focused on the executives who should be first in line for a twenty-first century guillotine–those wonderful men at Moody’s and Standard and Poor’s who performed what economist Joseph Stiglitz dubbed a modern version of medieval alchemy—converting lead into gold—by giving dozens and dozens of AAA ratings to paper that should have been treated like junk.

Mining many of the same sources Elliot Blair Smith used last September for two superb pieces for Bloomberg .com (here and here), Hinojosa did an excellent job of describing the rating agencies’ huge role in leading the whole economy down the drain.

The bottom line for all of us: we’re a long, long way from the bottom of this mess.

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Charles Kaiser is a former media critic for Newsweek and the author of three books, most recently The Cost of Courage, about one family in the French Resistance.