Monday, January 19, 2009

Who Do You Trust ?

You may remember from back in the summer, Shelia Bair -- head of the Federal Deposit Insurance Corporation -- received this glowing review in The Washington Post. In Paul Krugman's column today, she is mentioned again -- but in a different light.

Wall Street Voodoo

"The current buzz suggests, however, that policy makers aren’t willing to take either of these approaches. Instead, they’re reportedly gravitating toward a compromise approach: moving toxic waste from private banks’ balance sheets to a publicly owned “bad bank” or “aggregator bank” that would resemble the Resolution Trust Corporation, but without seizing the banks first.

Sheila Bair, the chairwoman of the Federal Deposit Insurance Corporation, recently tried to describe how this would work: “The aggregator bank would buy the assets at fair value.” But what does “fair value” mean?"

You might want to read the whole opinion piece.

" Why go through these contortions? The answer seems to be that Washington remains deathly afraid of the N-word — nationalization. The truth is that Gothamgroup and its sister institutions are already wards of the state, utterly dependent on taxpayer support; but nobody wants to recognize that fact and implement the obvious solution: an explicit, though temporary, government takeover."

I'll be honest, I don't really know which way to go. But Mr. Krugman, a world-class economist, has a way of making complex issues understandable. That might have something to do with the fact he's a teacher. Regardless, he makes sense. That is more that I can say (often) for Wall Street or Capitol Hill. But there's more to this than me confessing my ignorance of economics. What is missing out of this whole equation is trust. Trust in Wall Street. Trust in our government. If I can't trust Wall Street -- and I can't unless I understand it -- I won't give them my money. That is a major problem with our economy right now.

If we can't trust our government, we have even bigger problems. Our government relies on the consent of the governed -- you and me. Without it -- and the people's trust -- it is doomed to failure. Without government, we are doomed to chaos. Government and Wall Street need to realize that this consent relies on a certain amount of simplicity. They need to be understandable to a majority of the population. We tend to forget that every once in awhile. That's the reason we get things like derivatives. Those are built solely on trust -- they're too complicated for hardly anyone to understand. Even bankers. When that trust fails, everything fails. That's when the shooting starts.

Don Brown
January 19, 2009

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