People tend to get sensitive when I write about Matt Taibbi, so I'm going to tread carefully lest I be too intemperate. In a blog post Taibbi wrote about his new article -- a perfectly serviceable explanation, if divorced from context, of how Wall Street banks make their money -- Taibbi talks about some of his reporting on the response to the crisis:
But whatever we didn't do, we can be sure that what we did do was exactly wrong. Barry [Ritholtz] pointed out the classic pronunciation of Victorian economist/journalist Walter Bagehot, who said that in a crisis, a Central Bank should lend freely to solvent institutions against good collateral, at penalty rates. We did exactly the opposite: we lent to insolvent institutions, against shit collateral, at zero percent interest. We told these guys to drink themselves sober. Total crap thinking and totally typical.
Say word. This was in fact a key problem during the 2008 crisis: Regulators with limited authority had to choose between bailing out these institutions or letting them go into bankruptcy, with all the negative economic consequences that would entail. (Interestingly, current Treasury Secretary Tim Geithner advocated an agressive, Swedish-type solution early on but was overruled.)
Here's my point: The financial regulatory reform bill passed by the House of Representatives last year, and endorsed by Geithner and the rest of the Obama administration, does exactly [PDF] what Taibbi thinks it should, taking away the power of the Fed to lend to individual institutions and funneling all emergency loans through the FDIC, which can only make them to solvent institutions, and only during a liquidity crisis, just as Bagehot and Ritholtz prescribe. If something comparable passes the Senate, instead of getting loans during the next financial crisis, insolvent banks will be dissolved.
Now, the House bill isn't perfect. But it also does a lot of good things that would have prevented the crisis in 2008, including things that Taibbi and other aggressive critics of the financial sector think are good ideas.
-- Tim Fernholz
