FRONTLINE: Inside the Meltdown - PBS Tackles the Economic Crisis

[iNow]

The whole program is available for viewing at the following:

http://www.pbs.org/wgbh/pages/frontline/meltdown/

 

 

This was an amazingly well told story, and was doubly dramatic because it was all real and being experienced by all of us right now.

 

We've all been hearing about the economic issues in sound byte fashion... little piece-meal nuggets of information here and there, but nothing cohesive or anything which threaded it all together.

 

Well, in classic Frontline fashion, the history of the situation is brought together with interviews and insights few have heard. They focused heavily on the battle between systemic risk and moral hazard... how Paulson was a classic free-market, anti-regulation republican who believed to his core in moral hazard, but had to face the fact that systemic risk was more important... how he was torn apart by his fellow republicans for his actions with Bear Stearnes, and how he was defended by democrat Barney Frank when nobody else seemed to understand just how bad things had become and why he was doing all of this.

 

 

"When the situation changes, you have to be willing to change with the situation." ~ Henry Paulson

 

 

What struck me is how interconnected these entities were, how moral hazard simply wasn't an option, and how significantly the market spiralled downward when they got the sense nobody had a plan that was anything more than reactive.

 

 

What do you all think? Should we have allowed the great depression so we could stand on our principles? Were these men culpable, or were they simply mortals trying to do the best they could in a very very bad situation? Has the public been treating this situation all too academically and beyond reality, or have those who offer their opinion in opposition spent the time required and analyzed the risk for themselves, suspended their principles, and chosen that the steps which were taken still were not appropriate?

 

 

Feel free to comment on any part. Also, I strongly encourage you spend the hour to watch the program. IMO, it's a healthy representation of what journalism should be, and what seems so absent from so much of our news lately.

 

http://www.pbs.org/wgbh/pages/frontline/meltdown/view/

[CDarwin]

Oh, it was a very good program, and since I've decided to resurface, I might as well comment.

 

I didn't think it was so sympathetic to Henry Paulson, really. Just a month or two ago Newsweek was calling him "King Henry," a pragmatic, trusty steersman leading us through the waters of crisis. Now he's being accused of, and I believe this was a quote, "Destroying the world." It's striking to me how our heroes seem to falling away as this thing keeps going. First Greenspan, then Paulson, now even Geitner is taking hits on the vagueness of his credit plan.

[npts2020]

Oh, it was a very good program, and since I've decided to resurface, I might as well comment.

 

I didn't think it was so sympathetic to Henry Paulson, really. Just a month or two ago Newsweek was calling him "King Henry," a pragmatic, trusty steersman leading us through the waters of crisis. Now he's being accused of, and I believe this was a quote, "Destroying the world." It's striking to me how our heroes seem to falling away as this thing keeps going. First Greenspan, then Paulson, now even Geitner is taking hits on the vagueness of his credit plan.

 

You have to remember that these guys' jobs are to defend the system tooth and nail, far more than explaining why anything happens. One does not tell a lumberjack that there is no bacon for breakfast because you hoarded it all for yourself, you say there was someone who needed it more so "we" sacrificed a little to give it to them.

[CDarwin]

Oh, I'm not defending them. It's just interesting to me how, when it comes to the economy, we have such a tendency to build up 'maestros' and 'oracles' and put such implicit trust in them. That's why everyone is so angry and Paulson and Greenspan and such, because we all trusted them. Well, why did we trust them so much? There seems a danger the cycle might accelerate. Public officials (like Geitner) are invested with enormous public trust, misstep, and then rapidly lose it rendering them ineffective.

[iNow]

One thing that the special made clear is that this is especially so when you're talking about the market. It fascinated me how just the slightest "whiff" of non-control caused them to spasm into chaos... How simple rumors were enough to bring down some of the largest corporate entities.

 

Again, though... this is not a thread to rant about the stimulus or bailouts... Could we, please, try to avoid making it yet another one of those and talk about the special referenced in the OP, or the points made within? Pretty please?

[ecoli]

Oh, I'm not defending them. It's just interesting to me how, when it comes to the economy, we have such a tendency to build up 'maestros' and 'oracles' and put such implicit trust in them. That's why everyone is so angry and Paulson and Greenspan and such, because we all trusted them. Well, why did we trust them so much? There seems a danger the cycle might accelerate. Public officials (like Geitner) are invested with enormous public trust, misstep, and then rapidly lose it rendering them ineffective.

 

This is exactly the problem with central planning of the economy. But now our response of poor planning by government people is to give them even more control? ...

 

makes little sense to me.

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One thing that the special made clear is that this is especially so when you're talking about the market. It fascinated me how just the slightest "whiff" of non-control caused them to spasm into chaos... How simple rumors were enough to bring down some of the largest corporate entities.

 

I sort of agree here, but mostly disagree. This sort of speculation did send the financials into a tailspin, but that wouldn't have happened if the fundamentals where sound.

[Pangloss]

Great episode. It irks me to see Paul Krugman consulted as if he were an objective arbiter on economic matters (instead of someone who subverts his economic knowledge for ideological purposes), but I did think that the episode was really deep and insightful. The contrast between Paulson's ideology and what he felt compelled to do was really interesting.

 

I don't think that this episode instructs us about proper courses of action -- it would be a mistake to draw any conclusions about the bailouts or stimulus packages from this story, IMO. But it speaks volumes about the awesome weight of responsibility.

[ecoli]

If anyone is interested, here is a review from a free market economist about the documentary.

[iNow]

Great episode. It irks me to see Paul Krugman consulted as if he were an objective arbiter on economic matters (instead of someone who subverts his economic knowledge for ideological purposes),

Yeah... what were they thinking... consulting a nobel prize winning economist for some perspective. Those bastards!!

 

 

I don't think that this episode instructs us about proper courses of action -- it would be a mistake to draw any conclusions about the bailouts or stimulus packages from this story, IMO. But it speaks volumes about the awesome weight of responsibility.

That struck me also. We're all just human, trying to do the best with what we've got. I tend to respect them more after seeing them as real humans and not symbols or ideologues.

[bascule]

This is exactly the problem with central planning of the economy.

 

And what do you think of Greenspan's assertion that relying on free market principles (something as simple as companies acting in the best interests of their shareholders) was the central catalyst of this disaster?

[npts2020]

And what do you think of Greenspan's assertion that relying on free market principles (something as simple as companies acting in the best interests of their shareholders) was the central catalyst of this disaster?

 

What! Greed causing an economic disaster? No way, who could ever have predicted that?

[Pangloss]

You guys realize that this line of reasoning also directs one away from the left side of the equation too, don't you? It would be very foolish to see a message here of "Paulson wasn't liberal enough in his bailout policies". That's one of the problems with macro economics. It's easy to look back at what happened. Predicting what might have happened is a whole different ballgame.

 

I was thinking along similar lines the other day in contemplating a different kind of problem -- the tradeoff between ideologically-based foreign policy versus a basis of realpolitik. The country appears to be in the midst of a transformation from the former to the latter, but there are disadvantages to the latter as well that are being overlooked in our rush to form a foreign policy that's more conformative with current worldview. It's all well and good to look back on the "wins" of Kissinger's shuttle diplomacy or Nixon opening China. But we also need to remember "Never Chain Berlin", or the Iran Contra affair. Realpolitik has to be balanced by a solid understanding of what this country stands for, and what it does not.

 

Similarly, we have a mixed economy for a reason. The goal should be balancing forces, not "swinging the pendulum the other way for a while", as so many are saying these days. I understand what the author of ecoli's article is saying (walk down the middle of the road and get squashed like a grape), but that analogy only works if you remember that the sidelines are 5,000 cliffs, and we're a Mack truck -- we squash OTHERS like a grape. The trick is to have somebody at the wheel, paying attention, steering us around the largest obstacles and throwing a little assistance out the back for those that do get a little mushed along the way.

[npts2020]

Pangloss; This is what we need an economics forum for. Basically I agree with what you are saying but I think that economists have not been brought to task for their lack of precision at explaining what happens in the real world. IMO economists are generally far better at justification than they are at explanation. There is an interesting debate going on between utilitarians and prioritarians about how to valuate the future well-being of humanity vs present well-being of humanity. Utilitarians say that a person is of the same value/status regardless of their place in our timeline. Prioritarians say that present life is of more value than future lives, since the economy grows and future generations will be wealthier and better off than we are today. I believe where someone is in this debate will pretty fairly give their view of whether or not creating debt for future generations is appropriate.

[ecoli]

And what do you think of Greenspan's assertion that relying on free market principles (something as simple as companies acting in the best interests of their shareholders) was the central catalyst of this disaster?

I say he's ignoring a lot of government policy that also went into it (including a lot of his own).

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Pangloss; This is what we need an economics forum for.

I agree, and have pushed this agenda before.

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Similarly, we have a mixed economy for a reason. The goal should be balancing forces, not "swinging the pendulum the other way for a while", as so many are saying these days. I understand what the author of ecoli's article is saying (walk down the middle of the road and get squashed like a grape), but that analogy only works if you remember that the sidelines are 5,000 cliffs, and we're a Mack truck -- we squash OTHERS like a grape. The trick is to have somebody at the wheel, paying attention, steering us around the largest obstacles and throwing a little assistance out the back for those that do get a little mushed along the way.

 

The problem, pangloss, is that we don't have enough knowledge of economics (particular macro- here) to make intelligent policy decisions about where on the road we should stay on.

 

The point the author of the blog post is trying to make is that economic actors respond to signals from the government, and we're getting a lot of mixed signals, and that's probably dangerous.

 

Even if we knew everything about macroeconomics and how policy affects economic decisions, the special interest groups are still too strong for government to ever come to a consensus on what policies to pursue. And, indeed, how to avoid economic crises.

 

That's why I've come to the position that decentralizing economic activities makes the most sense (not that decentralizing economic activities will always produce growth).

[Pangloss]

The problem, pangloss, is that we don't have enough knowledge of economics (particular macro- here) to make intelligent policy decisions about where on the road we should stay on.

 

That's a fair point. But let's try a hypothetical here:

 

Let's say I am a banker, and under some unusual conditions that aren't important here, I am told by the government that they will back any one-time loan that I make. I say "groovy", and I loan you $100 trillion, to be paid back next Tuesday. You blow it over the weekend on chicks and beer, and next Tuesday rolls around and you say "sorry Pangloss, I ain't got it."

 

My question for you is this: Is there not a point where ideologies become irrelevant to the realities of the situation at hand?

 

I agree that we don't know enough to make some of the decisions we've been making lately. The problem is that we don't know enough to refrain from making them either. The libertarian/market crowd has been crooning a toon that they don't actually know the ending to -- this idea that the market will correct itself is all well and good, so long as you're okay with a change from a $14 trillion economy to a $14 economy. Are our principles really THAT important?

 

I keep thinking about that global warming video where the guy makes the choice boxes and asks whether you're talking about columns or rows. You know, this one:

 

zORv8wwiadQ

 

This keeps feeling to me like the same kind of situation here, and it just feels to me like we keep coming back to an argument of "we can't afford to do nothing", even if we leave the media influence completely out of it.

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ABC News' late-night program Nightline ran an interesting piece tonight about unusual niche opportunities in the midst of the housing crisis. They interviewed one enterprising real estate broker who showed the reporter a house that he was fixing up that he had specifically bought for resale -- you know, a "flipper" -- the sort of thing that is blamed for getting us into this mess, right? So he's like Mr. Evil, surely?

 

But no, he's just a hard-working guy who wants to turn a profit, just like anybody else. Yes, the house was worth $380k a couple of years ago and he bought it off foreclosure for 80k, but when asked whether he felt bad for the people who "lost their home", he pointed out a couple of things. The "owners" had "purchased" the house with 100% financing, and had lived in the house basically rent-free for 18 months prior to foreclosure. And when they left they took absolutely everything with them, from appliances to lighting fixtures -- stuff that was supposed to remain part of the house. So as he saw it they actually got a pretty good deal. (Sounds like it to me too.)

 

So he bought it for 80k, he's fixing it up, putting about $20,000 of his own money into the place, and hopes to sell it for around $140k. He's taking risks here that aren't covered by any government programs, and in the process he's employing local labor -- painters, landscapers, electricians and repair people. And he's doing this with several houses.

 

IMO that's what will ultimately save the economy. I'm still supportive of the idea of a stimulus plan, so long as it remains incentive-based rather than socialistic in nature, but in the end I do think it's going to be hard working folks like this guy who turn things around.

[iNow]

Yeah, that is cool. You may a really good point about the importance of guys (and gals) like that. I was going to respond to your comments that the scale of what they do is hardly comparable to larger corporations... that corporations employee tens of thousands, and guys like him only a handful... like 5 to 8 per house, usually a max of 50. I was thinking this was especially so with corporations involved in solar panel and wind turbine manufacturing... that they will be the drivers (which, they will have a large role in).

 

But, then... As I thought more about your comments, and scaled up this "one Nightline guy" across the rest of the country, I realized that the numbers will exceed hundreds of thousands and put the corporations to shame. You probably didn't mean to, Pangloss, but your closing comments caused a whole cascade of thought and exploration in me. Thanks for that.

 

The simple truth is that these organizations and people will each be carrying one section of the load... each hauling their own weight... and when taken together, that is what will tow our country and planet forward.

[Pangloss]

I've read recently that small business employs 70% of the labor force. But I'm sure there are many good people in big business too -- the Warren Buffet types who will have a major impact, especially in terms of leadership.

 

Anyway, I did my part this week, farming out a web site job to a former student. For me it was like "pfft, it's only a couple grand, and I have no time for it", but for him it was like "OMFG, that's months of rent and food!!!!" It's funny how that works.

[iNow]

A quote from President Obama:

 

Let me be clear: The choice we face is not between some oppressive government-run economy or a chaotic and unforgiving capitalism. Rather, strong financial markets require clear rules of the road, not to hinder financial institutions, but to protect consumers and investors, and ultimately to keep those financial institutions strong. Not to stifle, but to advance competition, growth and prosperity. And not just to manage crises, but to prevent crises from happening in the first place, by restoring accountability, transparency and trust in our financial markets. These must be the goals of a 21st century regulatory framework that we seek to create.

 

 

President Obama today took that problem head on by laying out 7 key principles for transforming the nation's regulatory system. We must:

 

1. Enforce strict oversight of financial institutions that pose systemic risks
   
   
2. Strengthen markets so they can withstand both system-wide stress and the failure of one or more large institutions
   
   
3. Encourage our financial system to be open and transparent, and to speak in plain language investors can understand
   
   
4. supervise financial products based on "actual data on how actual people make financial decisions"
   
   
5. Hold market players accountable, starting at the top
   
   
6. Overhaul our regulations so they are comprehensive
   
   
7. Recognize that the challenges we face are global
   
   

[Pangloss]

That speech was awesome, btw. I've been trying to figure out the best way to approach a new thread on it. Any suggestions?

[npts2020]

President Obama today took that problem head on by laying out 7 key principles for transforming the nation's regulatory system. We must:

 

1. Enforce strict oversight of financial institutions that pose systemic risks
   
   
2. Strengthen markets so they can withstand both system-wide stress and the failure of one or more large institutions
   
   
3. Encourage our financial system to be open and transparent, and to
   speak in plain language investors can understand
4. supervise financial products based on "actual data on how actual people make financial decisions"
   
   
5. Hold market players accountable, starting at the top
   
   
6. Overhaul our regulations so they are comprehensive
   
   
7. Recognize that the challenges we face are global
   
   

 

This is all well and good but the devil will be in the details, especially giving all of the terms precise enough definitions to have meaning. The part in #3 that I emboldened, for instance, is exactly how a great number of people in the financial sector have gotten rich, by making things too difficult for the average person to understand easily (need I mention an unregulated derivative market or Ponzi scams?).