Stockman on the Crisis that Wasn’t
| Peter Klein |
I’ve been complaining since 2008 that the justification for TARP and other forms of monetary and fiscal stimulus was never clearly stated. “The financial system would have collapsed” if Paulson and Bernanke had not made their unprecedented moves. But there was never any serious analysis or argument for this, just a series of bold (bald?) assertions.
This weekend’s ASC speech by former Reagan OMB Director David Stockman took the same line:
Based on the panicked advice of Paulson and Bernanke, of course, the president had the misapprehension that without a bailout “this sucker is going down.” Yet 30 months after the fact, evidence that the American economy had been on the edge of a nuclear-style meltdown is nowhere to be found. . . .
Still, the urban legend persists that in September 2008 the payments system was on the cusp of crashing, and that absent the bailouts, companies would have missed payrolls, ATMs would have gone dark and general financial disintegration would have ensued.
But the only thing that even faintly hints of this fiction is the commercial-paper market dislocation. Upon examination, however, it is evident that what actually evaporated in this sector was not the cash needed for payrolls, but billions in phony book profits, which banks had previously obtained through yield-curve arbitrages that were now violently unwinding.
Stockman argues (persuasively, in my view) that the commercial-paper market was going through a much-needed correction, and that the best response would have been to let the loan market adjust, according to market forces. After all, “nowhere was it written that GE Capital or the Bank One credit-card conduit, to pick two heavy users of the space, had a Federal entitlement to cheap commercial paper — so that they could earn fat spreads on their loan books.”
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