Brad, what is your position on the CDS bailout?

“deep expertise in CDO pricing models”

Being an expert in “models” these days means thinking that house prices cannot go down . So much for experts…

Part of it is that things really didn’t unravel until 2006-2007. If you went back to 2003, things seemed to be working quite well.

The big problem, which is a general problem in government, is that the people with the expertise are often the people that were in the industry. You just aren’t going to get someone with deep expertise in CDO pricing models and what went wrong with them outside of Wall Street, and the people that can tell you why the broke are most likely people that were involved in the mess.

GUERBY: Given the economy’s current economic situation, we really do need a Treasury secretary who can give answers, not just excuses.

No we don’t need people with answers, since it’s not what you don’t know that will kill you, it’s what you think you know that isn’t. Thinking that you know exactly what happened between 2003-2008 and exactly what is happening now is somewhat dangerous since you run the risk of getting it wrong.

GUERBY: The real question is whether Geithner has learned anything.

I’m pretty sure he has. The question is what exactly needs to be learned. People are still arguing over the causes and meaning of the Great Depression and the French Revolution, and I’m sure that fifty years from now people will still be arguing about what happened this summer.

I’d feel more comfortable with someone that is willing to say “I really don’t know what is going on” and to totally throw away the textbook when it doesn’t appear to be working, than to have someone that offers an answer to everything.

http://www.guardian.co.uk/commentisfree/cifamerica/2008/nov/24/barack-obama-timothy-geithner-treasury

“”"[...]

The other part of the story was the suspension of regulatory oversight of the financial industry. This allowed for huge over-leverage, predatory mortgages and the other excesses of the financial industry that fuelled the bubbles.

Geithner was in the middle of all this, even if not a lead actor. While this should not be forgiven – this recession and the millions of lives that are being ruined is not funny – it is not clear that Obama had very much choice.

In this respect, Obama faced the same sort of problem as those hoping to de-Ba’athify Iraq following the overthrow of Saddam Hussein. It would have been almost impossible to establish a government without including members of the Ba’ath party, since membership was a virtual requirement for holding a position of responsibility under Saddam.

Similarly, it would have been almost impossible to get to the top echelons of power, or even the middle ranks, during the Clinton-Bush years without giving lip service to the policies of one-sided financial deregulation and bubble-driven growth that were so fashionable at the time. The real question is whether Geithner has learned anything.

The jury is out on this point. After Bear Stearns sank in March, Geithner testified about the collapse before the Senate banking committee and gave the classic “who could have known” answer. Given the economy’s current economic situation, we really do need a Treasury secretary who can give answers, not just excuses.

It may not have been feasible for Obama to go the full de-Ba’athification route. But the real question is whether he wanted to.
“”"

dmg555, this blog post is a very good explanation of the phenomenon that’s scratching your head here.

Yes. It’s not a coincidence that the stock tanked the week we had hearings on what to do with GM. Also this puts Wall Street in a very interesting position with GM and the UAW. Normally, you think of labor and capital being on opposite sides, but in this situation, the last thing that Wall Street wants is for GM to crumble.

One problem is right now with GM is that no one has come up with a credible plan to save it. If just giving GM a $25 billion loan would fix the problem, then I’d be all for it. The trouble is that no one has explained how that would work.

Patrick: If so, then do you expect to see similar panics cascading through other bank stocks?

You did. Citi got most of the attention but all of the bank stocks tanked last week.

lb: unfortunately, citi is not helping these creditworthy consumers all that much by jacking up rates on their credit card balances.

Yes this is a huge problem which contributes to the spiral downward.

lb: now that the USG has just saved its glass behind, perhaps citi may see the moral & economic wisdom of not working in cross purposes to the objectives of its new primary investor/backstop…the flipside to moral hazard.

It’s very difficult to get someone who is scared to lend money.

lb: then again…perhaps not…why stop now when you can get it from both ends, right?

Citi loans out money to people with credit cards out of the belief that they are going to make money doing it, and if Citi loans out at 20% and everyone else loans out at 12%, then theory says that Citi should make less money. The trouble is that everyone is freaked out, so no one wants to loan money to anyone except for the government.