Adam, Federal Reserve, Lehman discussed on Bob Brinker


Block Island Sound, it's America's Monte program. Money talk. Bob Brinker along with you and our guest author in. This segment is Adam twos. Adam is the author of crashed our decadence financial crises changed the world Adam is Columbia University. Professor and he previously taught at Yale and at the university of Cambridge. And Adam is a prolific writer. He has an a number of other books. He has written, and I'm going to mention one in particular, the wages of destruction the making and breaking of the Nazi Konami will topic will come up during our discussion. Adam, I know you're in Berlin. I know you're burning the midnight oil. So I want to say thank you for being with us. And thank you for staying up late for us. Thank you for having me on. Well, we're delighted to have you on. And I have a copy of your book in my hands right here. And it's quite a work. I wanted to ask you, why did you write this book? Well, I think as a historian it was really striking hell as the crisis struck in two thousand eight a kind of in the histories of the crisis began to be created by by generalists by economists. And I felt at some point that this was a really interesting kind of test case to show students sort of different disciplines. In fact, how history get created and having set myself to kind of read and study all the other people who bought on writing these histories of the crisis. It felt I needed to kind of pull it all together and work like that. One of the things it's always fascinating fascinated me about the financial crisis. Is the fact that. In March of two thousand eight as you well know Bear, Stearns. Gotten a lot of trouble and wound up being bailed out in the end. With the help the Federal Reserve and. With the help of a major Bank. One of the things has always struck me. Is that I mean that was a really big deal. That was a real shock wave for for Wall Street and for the Federal Reserve and. And yet it really didn't serve the value of that warning shot across the bow. So relatively soon in March of two thousand eight didn't really. Accomplish what it should have accomplished? Because all right. They bailed them out and things move forward. And and then things still disintegrated within happy year, what are your thoughts on that? Absolutely. I mean, the best bailout is one to this day of the most controversial elements really of the story because. Song at the kits of what's known as the mole has hazard point of view. I think actually argue that the willingness of the fed to step in at that moment and to broker a sweetheart deal for J P Morgan to take. Said the wrong message it made the chief executive and so on Leeman kind of picky about deal for themselves. It made them feel that they had time to cut a deal that would really suit them. So there's a real I think question Mark about whether or not that bailout as necessary as it seemed at the time because the risk was the bad would. Go bankrupt be forced to engage in a fossil bend. The huge losses would have to be recognized on other balance-sheets that bailout may have in some sense. In fact. Heightened attention in the market because it allowed Leeman ready to take you long occupancy Merrill. Lynch's well thought long about really deciding that and they needed to take action urgently. Our guest is Adam twos. Adam is joining us from Berlin has new book crashed our decade of financial crises changed the world. We take a look at what happened in September of two thousand eight. And of course, the trigger moment for the the seizing of the credit markets worldwide, and very quick fashion was the Lehman bankruptcy. We've really spent a lot of time on this broadcast over the last decade kicking around. Why the decision was made to let Lehman go. And we've thrown out a lot of the excuses that were thrown out there. The Ben Bernanke excuse that. Well, we didn't have the power to do anything which we throw out because so many decisions were made at that time on the on the fly that no rules were being followed. They were trying to save the system and yet when it came when it came to Leeman they made what I do believe was a crucial mistake. I'm not suggesting we wouldn't have had a financial crisis. But I do think it made it worse. What are your thoughts? I agree. I mean, I do think respected was a mistake. I think if we look into the record of statements by secretary Treasury Secretary Paulson in the weeks before we look at Ben banenky actions. He remained basic the Washington in the run-up to that crisis. I think there's a clear I think mood possibly even a decision early on not to do another best. In other words, not to sweeten the deal. Not to take some of the worst assets off Lehman's books also provide some kind of guarantee my own view is that on Poulsen's pop. This was really a reflection on the political price that they had paid the Bush administration had paid for the bailout of Fannie Mae, and Freddie MAC. So to my mind, this is the Republican party. Really feeding the pinch this election. Yeah, they've done a truly spectacular active intervention with a Fannie Mae, Freddie. Mac cuisine. Nationalization, and they really just don't think that they can want to pay the political price. I think for a bailout of Liman, I think then there's another question that follows on from that. Which is if one imagines them having done, the Liman, bailout, obviously that resentment that fury would have risen to an even greater pitch. I think there's a real question in my mind about if they hadn't Liman had been bailed. Whether we would ever have gotten to top whether we would ever have gotten to a comprehensive recapitalization of the American banking system, so bad as it was. And I agree with you. I think it was a mistake not to bail Eamon the effect of not bathing. The men was ready to force everyone to look I class. I'd having Luke type of the cliffs, Dan, we moved to a much more radical kind of intervention with top. And of course, there was an irony in all of this as you well know because within within just a couple of days few days of deciding not to save Lehman. And then subsequently seeing the global credit markets freeze within twenty four hours and then they're faced with. Exactly. That switch switchback is is just dizzying. And you really I think see, you know, Monday morning. They're still celebrating in the treasury that they'd had the nerve to let Lehman go swaddled talked about Poulsen's number two. You talked about it being a good day to go to work in the treasury. And then within twenty four hours with AIG on the point of failure AIG would have been in trouble. I think whether or not leaving was allowed to go bankrupt. Because it was basically just getting margin calls on the on the credit default swaps suited retina, those were going to be called whether or not Leeman failed. They there's an about face a complete change of change of mind. It's a really it's a it's a whiplash. An incredible type of decision making at that moment and our guest Adam twos. Joining us from Berlin has written a book on a vast array of topics related. It's titled crashed how a decade of financial crises changed the world. We've also debated on this program with various help from from guests the topic of of whether the Federal Reserve. Did function in the end as the lender of last resort in the financial crisis. Given the fact a that Lehman was let go and be the financial crisis was such a total disaster. What are your thoughts? No, man. I think this is the one area where one has to say that the federal the Federal Reserve it didn't just act that you don't already historic scale. I mean, he's one of the appointed functions of central banks legitimate uncontested and uncontroversial to act as of lender-of-last-resort in a situation of a Bank run. No, Bank, real even a very well. Run Bank with very solid, very solid balance sheet can survive bankrupt. That's what we have a federal deposit insurance for to prevent the positives. Running and that's what's the lender of last resort function of the central Bank is for over spectacular about what the fed did it. All right. It's not only that it lent on an enormous scale trillions of dollars in liquidity to US banks. But he did it for the banks of the world. It provided trillions of dollars of liquidity to all of Europe's banks beginning in December two thousand and seven directly to that branches in New York and then in. Indirectly by way of what a what a cool liquidity. Swap lines to the central banks of Europe, I didn't doing so it really is zero lost to the fed. With collateral at all times. So minimizing the risk of possible. It really enabled the banking system to come through this crisis. Without that. There's no back ready that would have survived eight. Why do you think Adam that the Federal Reserve receives such a huge pushback against what they did in the financial crisis? I mean, they have been demonized constantly by many in this country. I think basically because what it revealed is this profoundly disconcerting fact about the modern monetary and financial system, which is being. Literally true since the early nineteen seventies. Which is the money is not founded on any substantial basis. It doesn't have a material depending it there's no gold sitting in the Federal Reserve vaults, which guarantee the value of money money is founded on the Fiat the authority of the American state and on the confidence that he's maintained across the entire economy by faith and confidence in the sound management of the monetary system. And there is something just very disconcerting about the elasticity that that implies goes in a crisis. It's also a great advantage to have a monetary system which can expand and that can prevent the sorts of catastrophic deflation which America suffered in the early nineteen thirties, but deep down I think many people find it extremely difficult to reconcile themselves to what in the end does put huge discretion. In the hands of politicians and the officials that they appoint. Adam do you think that Mario Draghi with his whatever it takes infamous, quote did a better job? Well, I mean in the end jogging came through, but that was off the years of failing and another even more fundamental function of central banks, which is the central banks all the market maker full government debt, governments legitimate issue debt for purposes of managing public finance. The needs to be agency the stabilisers that market and the fed the Bank of England the Bank of Japan, the Swiss National Bank will provide this as a matter, of course, to that government's the ECB is placed in such a peculiar position by the constitution. And the people running it before Marietta jockey was so conservative in that conception of that agency's role that they refuse to provide that support essentially in a sustained way for the European baumbach it, and it's that stadium on that part, which essentially is responsible for the panic in the sovereign debt markets if you're at between twenty ten and twenty twelve while jogging was a. Finally, doing was saying that this point the construction of Europe, the consolidation of its fiscal consolidation of its fiscal constitution is such that. I can do what any other central Bank will always to ninety whatever it takes to stabilize the bond market. So it was very light. It was better late than never. But it really was very late in the day. Our guest is that twos Columbia University. His new book is crashed our decade of financial crisis. Changed the world. And we're taking your calls after the break for Adam on our toll free line. You can talk.

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