Frontline picks up where "House of Cards" ends
Just finished watching Frontline’s “Inside the Meltdown.” It picks up where CNBC’s “House of Cards” stops.
“House of Cards” shows the dominoes being set up — how the U.S. financial system reached a crisis after issuing trillions of dollars of unlikely-to-be-repaid mortgages and tens of trillions of credit default swaps.
Frontline shows the dominoes falling down and Fed and Treasury officials scrambling desperately and chaotically to stop them from crashing into one another. It describes how allowing Lehman Brothers to fail triggered a cascade of frozen credit by signalling that any institution could fail. Realizing that other banks could go bankrupt tomorrow raised the perceived risk of loaning money and the risk of holding cash insufficient to meet the sort of run-on-the-bank that had already toppled Bear Stearns and Lehman. So, banks started hoarding their cash. This obviously hurt regular businesses which suddenly found themselves unable to borrow to meet their operating expenses.
My only complaint is that these shows describe what happened but largely ignore what should have happened differently. They fail to discuss the central role played by deregulatory zeal, without which this crisis could not have occurred. Credit default swaps were illegal for almost all of the 20th Century. What did we think would happen after we allowed executives to gamble trillions of dollars on unregulated derivatives? And the unrestrained lending to borrowers who obviously could not afford their mortgages should have been shut down and those who issued, packaged and re-sold such toxic mortgages to unsuspecting investors should have been thrown in jail many years ago.
Posted by James on Wednesday, February 18, 2009