The financial crisis

What next?

Global finance is being torn apart; it can be put back together again

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Readers' comments



You said
Finance is the brain of the economy. For all its excesses, it allocates resources to where they are productive better than any central planner ever could.

It seems to me one of the biggest problems with American capitalism is the assumption that profitable is the same as productive. I have no doubt that packaging mortages, creating derivitives and highly leveraged trading all these financial vehicles is very profitable. It is not clear to me that, once a mortage is granted, that all this fancy money movement increases the productivity of anything. It's easy to envision a market where reasonable mortgage loans are made where risk stays with the lender and borrower, where loans are available to all who want and can repay them and where Wall St is a fraction of it's current size. That world existed for a long time in America, and still exists many places.

I don't doubt that finance has helped some companies somewhere acquire new machinery, software or people that have truly made their businesses more productive, but please don't try to convince me that I only own a house today because of Lehman Brothers. This is both insulting and obtuse. First off, it should be obvious now that many people with homes can not afford them. So that subprime lending enabled by removing risk from the lender really wasn't productive at all in terms of creating lasting improvment. It sure was profitable in the short run - but again, profits aren't productivity. Second, home ownership rates across countries do not vary nearly as much as finances role in the mortgage industry. There are many ways in increase home ownership - if that is a goal. High finance as seen here in America is only one option, and does not look to be a necessary or desirable.
Do not forget that in the debate ahead.

Carlito Brigante

"Do not forget that in the debate ahead."Also, do not forget, in the debate ahead, that the treasury secretary is from an (now-kind-of-defunct) investment bank. He could be one that stirred the fire in the subprime mess in the first place.Yo, Hank, why don't you, with lipstick on your skinhead, put the two words: Moron Hazard?So that you can scare off financial morons, whoare hazardous, down the road. And that people can tell that you are one of them.


Paulson was the creator of these CDOs as Head of Goldman 1998-2006. He should deposit his 700 million dollar estate in the bailout and when taxpayers make money on the CDOs he can also share in profits.

People in wall street finace have gained enormously while now they want their pal Hank Paulson to give them more, The pary goes on for the fraudsters.

And the timing of the whole crisis is also peculiar,I guess lehman was thrown into bonfire so that the party for Goldman Sachs could continue.

Hail King Paul
Long Live United States of Wall Street Serfdom

Johnny Canuck

I like the suggestion of FormerRepublican about the IMF imposing a set of conditions for the U.S. like it did for Argentine/ The only problem is that the IMF is essentially a U.S. puppet organization. It is do as we say, not do as we do.

In any event I would add to the conditions that there be a substantial dditional federal tax on gasoline to bring the price up to European levels - the Unites States simply has to drastically reduce its consumption of oil if it is ever going to balance its current accounts and escape a real peril of gridlock in the event of a supply cut.


You saidFinance is the brain of the economy. For all its excesses, it allocates resources to where they are productive better than any central planner ever could.Is it true, Finance allocated resources to swapping of subprime assets. Tremendous profit was made in the process. CEOs and managements took all the cream. There is nothing wrong in earning money in ethical manner. What happened was greed and greed for making (not earning) money. It is not possible sustain growth without productive employment. Finance sector alone will only produce bubbles.Socialist planners are worse. They do not understand Finance. So proper regulation and punishment for excesses is the only solution. CEOs of failed banks will live happily till they live. Nobody is going to punish them.


I cannot believe that even The Economist has bought into the "too big to fail" argument used by industries throughout time and space to justify subsidies. So many years arguing for free-market policies in lesser and more esoteric matters, but when the time comes you spit on Milton Friedman's face! Let's review a few things: if several banks have made bad loans these losses are REAL. They are not a temporary liquidity problem. Therefore the US government is taking on the same losses that banks or hedge funds would have had to deal with. Plus the government may not be ( shall we say ) as aggressive in recovery of this debt, therefore actually increasing the losses. This is the type of analysis I would have expected of The Economist, not flowery language that parrots Administration press releases. And for the religious, try Mark 8:36

IFM Latin

The American society is the only one on Earth where you have:
(excess of greed) (excess of optimism) (excess of capital) (excess of entrepreneurship). The compounded product of this dangerous sum led to the Great Depression in the 30's and to "I don't know what" just now.
The G6 (G7 less one nation) should demonstrate them to take another route. Otherwise a new crisis will happen again and again. And the world economy will suffer. They should think that Africans and other poor people live without bonds, hedging or derivatives. And Africans need desperately a stable world economy to survive, just survive.

Fernando Villarreal

Quoting the author "Finance is the brain of the economy. For all its excesses, it allocates resources to where they are productive better than any central planner ever could. ", I can't give credit to such an absurd statement.

What the US financial sector is going through is nothing more than the direct consequence of irresponsible lending policies and the resulting snowball effect. If finance were the brain of the economy, then it would be a completely reckless one.

Now that the financial sector is agonizing, "The Economist" approves government intervention. This shows how double standard you are. If Hugo Chavez takes over a much smaller foreign company you would condemn it but not if it takes place in America.

Buddy Roe

In some manner of speaking, it was social engineering that is partly responsble for this mess. Fannie and Freddie were encouraged to loosen their requirments for credit worthiness in order make housing available to a broader spectrum of the American economy. This in turn flooded the economy with dollars which pushed up the price of everything, including energy and other commodities. With the sudden increase in the price of gasoline and everything else, those once barely affordable mortgages became more that many households could bare. Hence, the snowball started rolling down hill. Where the snowball stops and how big it will get, no one seems to know. But, throwing more money at a bad situation instead of a more thoughtful conservative approach may only make bad matters worse.


It would seem that the Chinese might have the right economic model for the 21st century. I mean a blend of capitalism and socialism. The USA seems to be following in their footsteps. Can it be that long until the rest of the world follows? Its time for serious economists to delve into the possibilities of different blends of these two idealogies.

Ian S.

"Financial capitalism [has] helped produce healthy economic growth and low inflation for a generation." It is time the Economist (and others) started proving such assertions instead of just chanting them as a mantra. Wouldn't we have enjoyed healthier growth without the excesses of financial capitalism? I am more than willing to believe what you wrote, but prove it, for taxpayers' money's sake!

Ian S.



Does anybody have ideas on what the IMF requirements would be if they step in to save the US economy? I am thinking along the lines of an Argentine type intervention.
Some obvious requirements would be cutting defense spending to $100 billion per year, raising taxes to balance the budget by 2012, devaluing the dollar by 40% to attain a balance of trade, etc.
As I recall the Argentineans were quite upset with the cure but it worked in the long run. What does it take for the IMF ride to the rescue because the Americans are incapable of straightening this out?
You may think this is preposterous but remember the IMF intervention in Britain that finally removed the pound as a reserve currency.


Over regulation of the City is bad. Effective law enforcement of the City is good.Historically law enforcement of the City in the UK has been weak. Why not pay the CEO of the FSA 10% more than the highest paid COE of any bank operating in the UK. Senior posts in the FSA should be rewarded pro rata.All this is better known as " Set a thief to catch a thief" The results could be interesting.P.S. A special Commercial Criminal Court should be formed, free from the supervision of the politicaly correct Court of Appeal.It could usefully be called the Court of Star Chamber. No doubt Standard & Poors would give it three stars provided they were sufficiently paid to do so!


From ABC News:"In 2007, Wall Street's five biggest firms-- Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch, and Morgan Stanley - paid a record $39 billion in bonuses to themselves.That's $10 billion more than the $29 billion loan taxpayers are making to J.P. Morgan to save Bear Stearns.Those 2007 bonuses were paid even though the shareholders in those firms last year collectively lost about $74 billion in stock declines --their worst year since 2002."Sure makes me eager to give these folks almost 1T in taxpayers' money.


SHAME on the Federal Reserve, the Treasury, the Controller of the Currency, and the the banking regulators that allowed the creation of this huge house of cards! SHAME on the auditors and the rating companies that failed to issue the necessary alerts.
Why are American banks unable to do simple business like home mortgage loans without the benefit of Government guarantees?
Are American homeowners that much more prone to default than borroweres elsewhere?
And why does an erstwhile insurance company build up such a huge portfolio of credit risk, so far outside its core business?
Let's see an quick orderly winding down of all the opaque deals-in-a-chain.
We need more than a new Glass-Steagall, we need honesty and transparency on the Balance Sheets.
PITY on the American TAXPAYER ...

Le canard

If we assess that the lame-duck of this mess were the banks and their CEO’s, well, we might find ourselves quite narrow-minded. After the depression, the US Congress created the Glass-Steagall Act, a high wall between investment and commercial banking (remember the failure of the Bank of US in 1930 with respect to its numerous securities affiliates?). But this act failed to attack the problem. In fact, they created brokerage firms with inadequate oversight and capital requirements, still, glass-separated from the commercial banks, so if they fail, they will not smash the commercial banks and its consumer deposits. Well, at least back then…. Over the decades, this “independent” brokerage firms became titanic investment banking firms, (i.e. Merrill, Goldman, Morgan, Lehman, B&S) withholding billions of mortgage back securities, engaging in leverage loans or buyouts, or trading all sort of derivatives but with so little oversight and very light cap requirements financed by the Fed short-borrowing window together with the creation of titanic mortgage government entities, (i.e. Freddie Mac, Fannie Mae). The US Congress, the Fed, the Secretary of Treasury, ultimately the US President let these entities decide into which business they should pitch for, because this is what free market is about, isn’t it? Nobody bother whether sky-rocketing prices in the real estate market will last forever, they’ve just package billion dollar mortgage-back-securities to everyone around the globe, prime, subprime, whatever. Now they envisage the losses in their b/s but they are already “too big to fail” “bullet-proof octopus” (the later, was not the case of Lehman, that’s why he went boosted) so, what are the options left? Bush must bail them out, and/or let them go back before the Glass-Steagall Act, yeah, let’s them become bank holdings companies so they do not need to mark to market all their billion losses in the subprime MBS and they will just record them us investments….. what the hell! But why we get to this point? Because it’s the US Congress and Government’s fault not to fairly oversight the investment banks’ business particularly when they became huge and heavy players in Wall Street. The Banks simply, but not humbly, did what they let them do, just business. Hence, going backwards the Glass-Steagall Act is clearly another way to sort things out but not solve things out.


In another words, finance exists to bolster other sectors of economy. Make it do its job and keep it humble, or they'll bring about another revolution and they'll be the first ones up against the wall.


Obviously there are many, many reasons for this financial crisis, among them are greed, low interest rates, financial deregulation, poor oversight by the SEC, Congress, lack of stringent penalties, incestous relationships between Wall Street and the regulators.It is estimated that the total GDP of the worlds economy is around $50 trillion per year while the financial industry has created transactions and instruments valued in hundreds of trillions. This is pure financial alchemy. To assume that the market will take care of itself is the biggest blunder. It is astonishing that greedy and bumbling capitalists are begging the government to bail out their losses.The US government is in a very deep hole with its own debt of $9 trillion and rising by the minute, it is well known that many foreign governments have invested heavily in US Treasury certificates as well as the two major mortgage house of Freddie Mac and Fannie Mae, and yet the government is digging the hole deeper by bailing out the insurance, banking and brokerage industry which have created hundreds of trillions out of thin air or mere paper. A mere $800 billion will never solve this systemic problem, a few trillions may help in the short run but the hole will be deeper. Unfortunately, the tax payers will be left with huge bills for succeeding generations. In the midst of this debacle Congress passes a Defense bill for $613 billion, it boggles the mind when so many are losing jobs and their homes. Surely, somewhere , Lord Gresham is as bewildered as the rest of us. Now bad money is chasing out the "bad" money as the US Treasury can print as much money as needed.


"Finance is the brain of the economy. For all its excesses, it allocates resources to where they are productive better than any central planner ever could.'This just reveals the advertisers and subscriber base of The Economist. Finance allocates capital, but it doesn't produce any real good/service. It'd be idiotic to base your economy so heavily on finance sector and drive all the bright people to finance sectors, especially for large countries like the US. Even city states like Singapore and Hong Kong had to fan out to manufacturing and other industries. In the end, you can't feed your family papers, or do anything else with papers. All the more reasons to separate out "mainstream" sector of finance and keep it stable by imposing a floor AND a ceiling.



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