What Led to the Recession and How to Bounce Back

I did an interview with the NJ Star Ledger recently, and its now on line:

Q: So, how did cheap money result in the age of bailouts? Why are bailouts so bad?

A: Essentially, the Treasury Department and the Federal Reserve panicked and just started throwing as much money as they could at these (banks). The phrase that we heard was “that we have to save the banking system.”

But if you want to save the banking system, you don’t care about individual banks. The best example of that is Japan in 1989. They had zombie banks around for 10, 15 years. They didn’t put any of their banks out of their misery, and they had a decade-long recession.

The idea of saying Citigroup is insolvent was unthinkable to them. They were a sacred cow. If the sacred cow gets mad cow disease, you’ve got to put it down. The problem with bailouts in general is when an industry or company goes bankrupt it typically means that there is a structural flaw in the setup of that company.

Instead of fixing the problem we’re essentially covering up the cracks with a lot of cash. We (still) have banks that are engaged in any manner of highly leveraged, highly reckless speculation. We have yet to fix that.

You can read the rest here.


PS: To paraphrase Robert Young, I am not an economist, I only play one on TV.


Economist Barry Ritholtz discusses what led to the recession and how to bounce back
Danny Teigman
The Star-LedgerThursday September 03, 2009, 6:00 AM

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