December 30, 2010
In Search of History on a Plate By SAM SIFTON
History buffs and first-time visitors had questions this week. Send me your own dining queries via dinejournal@nytimes.com or Twitter.com/samsifton.
Q. My partner and I are students of history, particularly New York City during the World War II years. I’m a native New Yorker, so I actually got to eat at the last Automat in the city on 42nd Street and Third Avenue before it closed. I would love to take my partner to eat at a place that hasn’t changed much, in both atmosphere and cuisine, since the 1940s. Any places you recommend around the city that would satisfy our curiosity?
A. Eisenberg’s Sandwich Shop, on Fifth Avenue between 22nd and 23rd Streets, ought to fit the bill nicely. It’s been in business since the late 1920s and has in its service, atmosphere and sandwiches something of what I imagine you’re looking for: history on a plate. Egg salad with bacon on rye, with a fountain Coke, and you’ll find yourself slipping back through the years.
When this question was posted on the Diner’s Journal blog of The New York Times, readers chimed in with their suggestions:
My father’s first meal in the U.S. when the war ended was at the Oyster Bar in Grand Central Terminal. I understand they had a fire sometime since, but they rebuilt it exactly as it was. I had the great fortune of eating there with him two decades ago, and he said it looked exactly the same. After my father died, my mother would visit my sister in New York at Thanksgiving, and I would come up from Philly that Friday for a lunch there in his honor. After my mother died, my sister and I continued the tradition. — JANA, Philadelphia
Sam, the must-have Eisenberg’s item is a chocolate egg cream. You are missing out if you haven’t tried it. — BodegaVendetta, New York
Why not have breakfast or lunch at Barney Greengrass? It’s been there forever (as have the Formica counters). and it is a real piece of New York history. Plus, the smoked fish is excellent. — rts, New York
Q. My 16-year-old niece and a school friend, both from London, will be staying with me in Greenwich Village over a weekend in February. Both are low key, sporty and fairly unhip. Where would you suggest that I take them for a Saturday evening meal? Thank you very much for your ideas.
A. Take them to Mary’s Fish Camp and introduce them to America. Or go to Otto for fancy pizza. (You could go to Arturo’s for old-school, not-fancy pizza, instead: deeply unhip.) Maybe Bianca on Bleecker Street? And cute little Jean Claude on Sullivan Street for Saturday night.
Q. What Italian restaurant would you recommend in the city for a family of 10 for dinner? We have eaten at Alto, Convivio, Al di Là, Il Mulino, Del Posto, Pó, Lupa and Babbo. Price is not an issue.
A. That’s a good position in which to find yourself! Make a reservation at Scarpetta and see how you do. Scott Conant’s the chef, a pasta wizard out of Waterbury, Conn., who cooked at Alto and L’Impero before he had a falling out with Chris Cannon, an owner of those restaurants, who then hired the chef Michael White for both properties, made one of them Convivio and, with Mr. White, opened Marea, which you should also totally try except that, well, it’s a long story spooling itself out right now in lawyers’ offices at around $700 an hour. Go to Scarpetta. Black tagliolini with lobster and minted bread crumbs!
Q. I’m coming to New York for the first time from Australia for a week at the end of January. While I can’t wait to try out some of the food experiences I’ve been reading about all these years, I’m feeling a bit overwhelmed by choice. Can you suggest some quintessential dining experiences for a first-timer? Despite the great state of the Aussie dollar at the moment, and because I’ll be traveling alone, I’ll probably steer clear of the high-end restaurants this time. I’m looking to spend no more than $60 a meal at the top end for dinner and will be staying in the East Village. I’m up for just about anything.
A. First time in the big town, eh? You could never leave the East Village and do well by Jack’s Luxury Oyster Bar and Momofuku Ssam Bar. You should certainly have a lunch at Katz’s. Perhaps you should spend one evening tucked into a meal (and the crowd) at the Spotted Pig. Up in Midtown I like the idea of a newcomer experiencing the scene at P. J. Clarke’s. And here is one thing you should do, for sure: walk across the Brooklyn Bridge in the afternoon wearing something decent under your coat, so that you can have an early drink at the River Café before walking back to have dinner in Chinatown, at Oriental Garden.
Old Favorites and New Discoveries
ARTURO’S 106 West Houston Street, at Thompson Street, West Village; .
BARNEY GREENGRASS 541 Amsterdam Avenue, at 86th Street; (212) 724-4707, barneygreengrass.com.
BIANCA 5 Bleecker Street, between Bowery and Elizabeth Streets, Greenwich Village; (212) 260-4666, biancanyc.com.
EISENBERG’S SANDWICH SHOP 174 Fifth Avenue, between 22nd and 23rd Streets, Flatiron district; (212) 675-5096.
JACK’S LUXURY OYSTER BAR 101 Second Avenue, at Sixth Street, East Village; (212) 979-1012.
JEAN CLAUDE 137 Sullivan Street, between Prince and West Houston Streets, SoHo; (212) 475-9232.
KATZ’S DELICATESSEN 205 East Houston Street, between Ludlow and Orchard Streets, Lower East Side; (212) 254-2246, katzdeli.com.
MAREA 240 Central Park South; (212) 582-5100, marea-nyc.com.
MARY’S FISH CAMP 64 Charles Street, at West Fourth Street, West Village; (646) 486-2185, marysfishcamp.com.
MOMOFUKU SSAM BAR 207 Second Avenue, at 13th Street, East Village; (212) 777-7773, momofuku.com/ssam-bar.
ORIENTAL GARDEN 14 Elizabeth Street, between Bayard and Canal Streets, Chinatown; (212) 619-0085, orientalgardenny.com.
OTTO One Fifth Avenue, between East Eighth Street and Washington Mews, Greenwich Village; (212) 995-9559, ottopizzeria.com.
OYSTER BAR Grand Central Terminal (lower level); (212) 490-6650, oysterbarny.com.
P. J. CLARKE’S 915 Third Avenue, at 55th Street, Manhattan; (212) 317-1616, pjclarkes.com.
RIVER CAFE 1 Water Street, at the East River, Dumbo, Brooklyn; (718) 522-5200, rivercafe.com.
SCARPETTA 355 West 14th Street, meatpacking district; (212) 691-0555, scottconant.com/restaurants/scarpetta/new-york.
SPOTTED PIG 314 West 11th Street, West Village; (212) 620-0393, thespottedpig.com.
This article has been revised to reflect the following correction:
Correction: December 31, 2010
An earlier version of this article misidentified Grand Central Terminal.
Showing posts with label History. Show all posts
Showing posts with label History. Show all posts
Thursday, December 30, 2010
Saturday, August 08, 2009
Lunch with the FT: Jared Diamond By David Pilling
Lunch with the FT: Jared Diamond By David Pilling
Published: August 7 2009 15:22 | Last updated: August 7 2009 15:22
Jared DiamondJared Diamond is the guru of collapse. Collapse is the title of one of the books that have made him a world-famous academic. It is a theme that captures the Zeitgeist: markets have collapsed, banks have collapsed and confidence, even in the capitalist system itself, has collapsed.
Diamond's celebrated book – which added to the reputation he earned through Guns, Germs andSteel, a Pulitzer prize-winner about why some societies triumph over others – sought to discover what makes civilisations, many at their apparent zenith, crumble overnight. The Maya of Central America, the stone-carving civilisation of Easter Island, and the Soviet Union – all suddenly shattered.
The question lurking in Diamond's work is: could we be next? Could the great skyscrapers of Manhattan one day become deserted canyons of a bygone civilisation, a modern version of Ozymandias's trunkless legs of stone?
Such thoughts are not top of my mind as I swing, in a bright yellow cab, past the splendid mansions of Bel Air under a cloudless Los Angeles sky. I had proposed meeting Diamond in Papua New Guinea, the place where his background in anthropology and evolutionary biology began to converge. Diamond had replied that he rarely made it to Papua New Guinea these days, and why didn't we have lunch at his Californian home instead.
After graduating from Harvard and then Cambridge, where he studied membrane biophysics, Diamond devoted years to researching the way substances, such as sugar, find their way in and out of cells. "I was the world's gall bladder expert," is how the 71-year-old describes his early years in academia. The gall bladder proved too confined a world. In his 20s, he studied the ornithology of New Guinea, publishing his first book, Avifauna of the EasternHighlands of New Guinea, in 1972. Over the next two decades he began to apply multi-scientific disciplines – including linguistics, evolutionary biology and environmental history – to big questions. The Third Chimpanzee, published in 1992 about human development, was followed by Why Sex isFun, the subject of which is pretty self-explanatory, and in 1998, Guns, Germs andSteel, the breakthrough work that brought him plaudits from scientists and generalists alike.
Set back from the road behind a white picket fence, Diamond's home is smaller and less gaudy than the surrounding mansions and mock châteaux. Nonetheless, it is quietly splendid. The professor of geography at UCLA, who is working on a book about what modern civilisation can learn from tribal societies, is waiting at the threshold to greet me. He is wearing a pink-and-white-striped shirt and casual slacks. Even from a distance I spot his white-peppered beard, neatly trimmed, in almost Amish style.
We make our way through a large hallway to the spacious kitchen at the rear. Diamond's wife is on her way out. Calling her "sweetie", he gives her a kiss and then, opening the cavernous refrigerator, announces in town-crier fashion: "Jared Diamond declares that he is about to pull out the California speciality of pomegranate juice, to which a story attaches. And then it is salmon, and orzo with spinach and bacon, and mixed vegetables that include squash with sage. And there is also yoghurt and there is an avocado and there is grapefruit."
I am famished, and opt for a bit of everything. Diamond ferries dishes to the large wooden table at which I am seated, my back to a pristine lawn. The plates he sets before me include one bearing a strikingly large wedge of chilled, delicately pink salmon that turns out to be the most succulent I have ever tasted.
As he moves between fridge and table, he launches into his pomegranate story. "Pomegranate was one of the first fruits domesticated in the world. It was domesticated in the Fertile Crescent around 4000 BC," he says. "A friend of mine, a very successful businessman, bought farm acreage in the central valley of California, which is the most productive agricultural area in the US. And there happened to be 100 acres of pomegranates, about which he knew very little. So he started learning about them and discovered how healthy they are, that they are full of vitamins and full of antioxidants and that they may be a treatment for prostate cancer."
OUTSTANDING SCIENCE BOOKS
Stephen Jay Gould to Bill Bryson
Jared Diamond has twice won the Royal Society Prize for Science Books, for The Rise and Fall of the Third Chimpanzee (1992) and for Guns, Germs and Steel (1998). Nicknamed the Booker Prize for science writing, the £10,000 award goes to an author chosen from a shortlist of six. Sir Philip Ball, who won the 2005 prize for Critical Mass: How One Thing Led to Another, is one of the judges for this year's prize, the results of which are announced on September 15. He tells John Sunyer about his favourite past-winners:
Wonderful Life (1991), by Stephen Jay Gould
"This is Gould's most popular and probably best book. It uses the story of the fossils of the Burgess Shale – a collection which shows how living creatures vastly diversified in form at the start of the Cambrian period – to explore Gould's views on how evolution happens, how it is represented in culture, and why it is so much a matter of chance."
Guns, Germs and Steel (1998), by Jared Diamond
"This isn't just a description of what we know but presents an original and important thesis in an accessible form. Diamond explores how human civilisation has been shaped by the geographical settings in which it has occurred: a vast, even awesome, topic."
Right Hand, Left Hand (2003), by Chris McManus
"Everything you could want to know about why left-right symmetry exists and what it means in nature, in humans, in art and in culture.
It is one of those books that isn't afraid to venture wherever the topic takes us, whether that is the origin of life, Billy the Kid or Thomas Mann's Magic Mountain. It's my favourite sort of science book, in which the science is just a launching pad for excursions into all kinds of wild and wonderful terrain."
A Short History of Nearly Everything (2004), by Bill Bryson
"Just what science needs: the ideal beginner's guide for anyone who thinks that science is scary. Bryson uses his outsider's perspective to fantastic advantage, asking the questions that every non-scientist wants to have answered. And, of course, it is funny too."
The 2009 shortlist is at www.royalsociety.org/
sciencebooks
The friend, Stewart Resnick, had the capital and commercial acumen to spread the message to the US consumer. Thus did the pomegranate boom begin, and the fruit make its way to the refrigerators of 21st-century America. The story somehow captures Diamond. We have the awe of ancient civilisations, the physical explanation of the fertile soil of ancient Mesopotamia and modern California, and the accident of his friend's financial resources and ingenuity. In this way, all things, big and small, come to pass.
There is no obvious segue between pomegranates and the recent shock to Anglo-Saxon capitalism but we get there via a discussion of collapsing fish stocks, a subject prompted by the salmon. Diamond knows I used to live in Japan and says, "If I was Japan's worst enemy trying to figure out a strategy to drive it into a crisis in 10 years' time, my strategy would be to get the Japanese to do exactly what they are doing, which is to over-harvest their main source of protein." Humans' ability to destroy the basis of their own livelihood is a recurring Diamond theme.
"There is a parallel based on the same fundamental mechanisms of the economic collapse that we're seeing now and the collapse of past civilisations such as the Maya," he continues. "The message is that when you have a large society that consumes lots of resources, that society is likely to collapse once it hits its peak."
He helps himself to a mouthful of vegetables, bought from the supermarket but as fresh-tasting as if he had dug them from the garden. Chewing slowly, he continues: "The Maya collapse began in the late 700s, and then simply the most advanced society in the New World collapsed over the course of several decades. They were mostly gone a century later," he says wistfully. "When a complex structure like that starts collapsing, you are pulling out dominoes in the whole structure."
I ask whether Lehman Brothers is such a domino. "The events of last October have crept up seemingly so suddenly," he replies: "I say 'seemingly' because, in a sense, it is not at all sudden. Any idiot knows that if you are drawing more money out of your bank than you are paying into your bank, then eventually something is going to happen. Somehow this lesson escaped the decision-makers in the US government."
Much of his writing suggests that only those societies able to stamp out unsustainable habits – over-logging, overspending, over-extension – have the ability to survive, I say, helping myself to more pomegranate juice. One might conclude that free-market economies, with less ability to rein in over-consumption of blue-fin tuna or over-leverage of red-blooded bankers, were more vulnerable to sudden failure.
But Diamond rejects the notion that his work can be read as advocating authoritarian central planning. "When people talk about the greater efficiency of dictatorships, they are forgetting that a dictatorship is no more likely than a democracy to make a wise decision," he says. The Chinese government moved quickly to ban lead in petrol, but it also virtually abolished education during a phase of the Cultural Revolution, he says. A democracy could never do that.
"This is orzo," he says, his mind turning to the barley-shaped pasta he is spooning onto my plate. As he traipses off to fetch a selection of teas, I notice he is wearing blue cloth sandals. A lawnmower buzzes in the background. In a hutch on the kitchen floor, a large rabbit munches away quietly. "You are welcome to try these," he says, returning with some fancy-labelled bottles. "We have pomegranate lychee green tea, pomegranate hibiscus green tea, pomegranate white tea."
Diamond strikes me as such a thoughtful man, so empathetic to other cultures and so obviously liberal in his outlook, that I was surprised to learn that some critics have described him as something close to a racist. According to his detractors, he puts too much emphasis on the environment and too little on social factors, thereby implying that people cannot change their physical inheritance.
But Guns, Germs and Steel, a book that sets out to discover why Europeans conquered the Aztecs, and not the other way around, seems to me a cogent demolition of racism. Dismissing as nonsense the argument that Europeans were racially or culturally superior, the book seeks to find the real reasons.
"Why do they say it is racism?" Diamond winces, clearly upset. "I think mainly because I discussed the subject at all. But I discuss why X conquered Y because it is a big question of history." He pauses before addressing his imaginary critics: "It is perverse and weird." Collapse is subtitled How Societies Choose to Fail or Succeed, a swipe at those who suggest his books preclude choice. There is plenty of room for free will, he says. Yet he is sticking to his conviction that geography – the ease with which wild plants can be domesticated, or the prevalence of certain diseases – can have profound effects on a society's development.
"Was it a cultural choice that the Inuit up in the Arctic did not become farmers? No, it wasn't. You could not have agriculture in the Arctic," he bristles. "So it seems to me that the rise of agriculture in the modern world really does involve strong environmental influences. And if you want to call that geographical determinism, you can call it geographical determinism. Except that we are taught to react to that like you should react to wife-beating and incest with your mother: we all know it is not nice, and that it should be stopped.
"I find the easiest way to eat these is just to cut off the top and then break it into segments," he says, his focus suddenly narrowing from controversies of human agriculture to the single grapefruit before us. The abundance of food in his kitchen prompts me to return to the theme of sustainability.
"The average per-person consumption rate in the first world of metal and oil and natural resources is 32 times that of the developing world," says Diamond. "That means that one American is consuming like 32 Kenyans." The problem is not the number of Kenyans, the problem is when Kenyans or, more pressingly, big developing countries such as China, gain the ability to consume like Americans.
Can't humans simply increase the supply of resources as they have done before? "We can change the supply of some things if there is only one limiting resource. If it is food, then we can have a green revolution and produce more crops," he says. "Unfortunately, we need lots of resources. We need food, we need water. We are already using something like 70 or 80 per cent of the world's fresh water. So you say, 'Alright, we'll get around water by desalinating sea water.' But then there's the energy ceiling, and so on."
With a nod to the feast before us, I say there seems little chance that Chinese or Indians will forgo the opportunity to live a western-style existence. Why should they? It is even more improbable that westerners will give up their resource-hungry lifestyles. Diamond, for example, is not a vegetarian, though he knows a vegetable diet is less hard on the planet. "I'm inconsistent," he shrugs. But if we can't supply more or consume less, doesn't that mean that, like the Easter Islander who chopped down the last tree, thus condemning his civilisation to extinction, we are doomed to drain our oceans of fish and empty our soil of nutrients?
"No. It is our choice," he replies, perhaps subconsciously answering his critics again. "If we continue to operate non-sustainably, then in 50 or 60 years, the US and Japan and Europe will be in bad shape. But my friends in the highlands of New Guinea will be fine. Some of my friends made stone tools when they were children and they could just go back to what their ancestors were doing for 46,000 years. New Guinea highlanders are not doomed," he says, draining his pomegranate juice. "The first world lifestyle will be doomed if we don't learn to operate sustainably."
David Pilling is the FT's Asia editor
..................................................
Jared Diamond's house
Bel Air, Los Angeles
Chilled salmon
Orzo with bacon and spinach
Mixed roast vegetables
One avocado
One grapefruit
One pomegranate lychee green tea
Lots of pomegranate juice
FT.com print article (9 August 2009)
http://www.ft.com/cms/s/2/144fa854-82e2-11de-ab4a-00144feabdc0,dwp_uuid=e502ea62-6264-11da-8dad-0000779e2340,print=yes.html
http://snipurl.com/pirde
Published: August 7 2009 15:22 | Last updated: August 7 2009 15:22
Jared DiamondJared Diamond is the guru of collapse. Collapse is the title of one of the books that have made him a world-famous academic. It is a theme that captures the Zeitgeist: markets have collapsed, banks have collapsed and confidence, even in the capitalist system itself, has collapsed.
Diamond's celebrated book – which added to the reputation he earned through Guns, Germs andSteel, a Pulitzer prize-winner about why some societies triumph over others – sought to discover what makes civilisations, many at their apparent zenith, crumble overnight. The Maya of Central America, the stone-carving civilisation of Easter Island, and the Soviet Union – all suddenly shattered.
The question lurking in Diamond's work is: could we be next? Could the great skyscrapers of Manhattan one day become deserted canyons of a bygone civilisation, a modern version of Ozymandias's trunkless legs of stone?
Such thoughts are not top of my mind as I swing, in a bright yellow cab, past the splendid mansions of Bel Air under a cloudless Los Angeles sky. I had proposed meeting Diamond in Papua New Guinea, the place where his background in anthropology and evolutionary biology began to converge. Diamond had replied that he rarely made it to Papua New Guinea these days, and why didn't we have lunch at his Californian home instead.
After graduating from Harvard and then Cambridge, where he studied membrane biophysics, Diamond devoted years to researching the way substances, such as sugar, find their way in and out of cells. "I was the world's gall bladder expert," is how the 71-year-old describes his early years in academia. The gall bladder proved too confined a world. In his 20s, he studied the ornithology of New Guinea, publishing his first book, Avifauna of the EasternHighlands of New Guinea, in 1972. Over the next two decades he began to apply multi-scientific disciplines – including linguistics, evolutionary biology and environmental history – to big questions. The Third Chimpanzee, published in 1992 about human development, was followed by Why Sex isFun, the subject of which is pretty self-explanatory, and in 1998, Guns, Germs andSteel, the breakthrough work that brought him plaudits from scientists and generalists alike.
Set back from the road behind a white picket fence, Diamond's home is smaller and less gaudy than the surrounding mansions and mock châteaux. Nonetheless, it is quietly splendid. The professor of geography at UCLA, who is working on a book about what modern civilisation can learn from tribal societies, is waiting at the threshold to greet me. He is wearing a pink-and-white-striped shirt and casual slacks. Even from a distance I spot his white-peppered beard, neatly trimmed, in almost Amish style.
We make our way through a large hallway to the spacious kitchen at the rear. Diamond's wife is on her way out. Calling her "sweetie", he gives her a kiss and then, opening the cavernous refrigerator, announces in town-crier fashion: "Jared Diamond declares that he is about to pull out the California speciality of pomegranate juice, to which a story attaches. And then it is salmon, and orzo with spinach and bacon, and mixed vegetables that include squash with sage. And there is also yoghurt and there is an avocado and there is grapefruit."
I am famished, and opt for a bit of everything. Diamond ferries dishes to the large wooden table at which I am seated, my back to a pristine lawn. The plates he sets before me include one bearing a strikingly large wedge of chilled, delicately pink salmon that turns out to be the most succulent I have ever tasted.
As he moves between fridge and table, he launches into his pomegranate story. "Pomegranate was one of the first fruits domesticated in the world. It was domesticated in the Fertile Crescent around 4000 BC," he says. "A friend of mine, a very successful businessman, bought farm acreage in the central valley of California, which is the most productive agricultural area in the US. And there happened to be 100 acres of pomegranates, about which he knew very little. So he started learning about them and discovered how healthy they are, that they are full of vitamins and full of antioxidants and that they may be a treatment for prostate cancer."
OUTSTANDING SCIENCE BOOKS
Stephen Jay Gould to Bill Bryson
Jared Diamond has twice won the Royal Society Prize for Science Books, for The Rise and Fall of the Third Chimpanzee (1992) and for Guns, Germs and Steel (1998). Nicknamed the Booker Prize for science writing, the £10,000 award goes to an author chosen from a shortlist of six. Sir Philip Ball, who won the 2005 prize for Critical Mass: How One Thing Led to Another, is one of the judges for this year's prize, the results of which are announced on September 15. He tells John Sunyer about his favourite past-winners:
Wonderful Life (1991), by Stephen Jay Gould
"This is Gould's most popular and probably best book. It uses the story of the fossils of the Burgess Shale – a collection which shows how living creatures vastly diversified in form at the start of the Cambrian period – to explore Gould's views on how evolution happens, how it is represented in culture, and why it is so much a matter of chance."
Guns, Germs and Steel (1998), by Jared Diamond
"This isn't just a description of what we know but presents an original and important thesis in an accessible form. Diamond explores how human civilisation has been shaped by the geographical settings in which it has occurred: a vast, even awesome, topic."
Right Hand, Left Hand (2003), by Chris McManus
"Everything you could want to know about why left-right symmetry exists and what it means in nature, in humans, in art and in culture.
It is one of those books that isn't afraid to venture wherever the topic takes us, whether that is the origin of life, Billy the Kid or Thomas Mann's Magic Mountain. It's my favourite sort of science book, in which the science is just a launching pad for excursions into all kinds of wild and wonderful terrain."
A Short History of Nearly Everything (2004), by Bill Bryson
"Just what science needs: the ideal beginner's guide for anyone who thinks that science is scary. Bryson uses his outsider's perspective to fantastic advantage, asking the questions that every non-scientist wants to have answered. And, of course, it is funny too."
The 2009 shortlist is at www.royalsociety.org/
sciencebooks
The friend, Stewart Resnick, had the capital and commercial acumen to spread the message to the US consumer. Thus did the pomegranate boom begin, and the fruit make its way to the refrigerators of 21st-century America. The story somehow captures Diamond. We have the awe of ancient civilisations, the physical explanation of the fertile soil of ancient Mesopotamia and modern California, and the accident of his friend's financial resources and ingenuity. In this way, all things, big and small, come to pass.
There is no obvious segue between pomegranates and the recent shock to Anglo-Saxon capitalism but we get there via a discussion of collapsing fish stocks, a subject prompted by the salmon. Diamond knows I used to live in Japan and says, "If I was Japan's worst enemy trying to figure out a strategy to drive it into a crisis in 10 years' time, my strategy would be to get the Japanese to do exactly what they are doing, which is to over-harvest their main source of protein." Humans' ability to destroy the basis of their own livelihood is a recurring Diamond theme.
"There is a parallel based on the same fundamental mechanisms of the economic collapse that we're seeing now and the collapse of past civilisations such as the Maya," he continues. "The message is that when you have a large society that consumes lots of resources, that society is likely to collapse once it hits its peak."
He helps himself to a mouthful of vegetables, bought from the supermarket but as fresh-tasting as if he had dug them from the garden. Chewing slowly, he continues: "The Maya collapse began in the late 700s, and then simply the most advanced society in the New World collapsed over the course of several decades. They were mostly gone a century later," he says wistfully. "When a complex structure like that starts collapsing, you are pulling out dominoes in the whole structure."
I ask whether Lehman Brothers is such a domino. "The events of last October have crept up seemingly so suddenly," he replies: "I say 'seemingly' because, in a sense, it is not at all sudden. Any idiot knows that if you are drawing more money out of your bank than you are paying into your bank, then eventually something is going to happen. Somehow this lesson escaped the decision-makers in the US government."
Much of his writing suggests that only those societies able to stamp out unsustainable habits – over-logging, overspending, over-extension – have the ability to survive, I say, helping myself to more pomegranate juice. One might conclude that free-market economies, with less ability to rein in over-consumption of blue-fin tuna or over-leverage of red-blooded bankers, were more vulnerable to sudden failure.
But Diamond rejects the notion that his work can be read as advocating authoritarian central planning. "When people talk about the greater efficiency of dictatorships, they are forgetting that a dictatorship is no more likely than a democracy to make a wise decision," he says. The Chinese government moved quickly to ban lead in petrol, but it also virtually abolished education during a phase of the Cultural Revolution, he says. A democracy could never do that.
"This is orzo," he says, his mind turning to the barley-shaped pasta he is spooning onto my plate. As he traipses off to fetch a selection of teas, I notice he is wearing blue cloth sandals. A lawnmower buzzes in the background. In a hutch on the kitchen floor, a large rabbit munches away quietly. "You are welcome to try these," he says, returning with some fancy-labelled bottles. "We have pomegranate lychee green tea, pomegranate hibiscus green tea, pomegranate white tea."
Diamond strikes me as such a thoughtful man, so empathetic to other cultures and so obviously liberal in his outlook, that I was surprised to learn that some critics have described him as something close to a racist. According to his detractors, he puts too much emphasis on the environment and too little on social factors, thereby implying that people cannot change their physical inheritance.
But Guns, Germs and Steel, a book that sets out to discover why Europeans conquered the Aztecs, and not the other way around, seems to me a cogent demolition of racism. Dismissing as nonsense the argument that Europeans were racially or culturally superior, the book seeks to find the real reasons.
"Why do they say it is racism?" Diamond winces, clearly upset. "I think mainly because I discussed the subject at all. But I discuss why X conquered Y because it is a big question of history." He pauses before addressing his imaginary critics: "It is perverse and weird." Collapse is subtitled How Societies Choose to Fail or Succeed, a swipe at those who suggest his books preclude choice. There is plenty of room for free will, he says. Yet he is sticking to his conviction that geography – the ease with which wild plants can be domesticated, or the prevalence of certain diseases – can have profound effects on a society's development.
"Was it a cultural choice that the Inuit up in the Arctic did not become farmers? No, it wasn't. You could not have agriculture in the Arctic," he bristles. "So it seems to me that the rise of agriculture in the modern world really does involve strong environmental influences. And if you want to call that geographical determinism, you can call it geographical determinism. Except that we are taught to react to that like you should react to wife-beating and incest with your mother: we all know it is not nice, and that it should be stopped.
"I find the easiest way to eat these is just to cut off the top and then break it into segments," he says, his focus suddenly narrowing from controversies of human agriculture to the single grapefruit before us. The abundance of food in his kitchen prompts me to return to the theme of sustainability.
"The average per-person consumption rate in the first world of metal and oil and natural resources is 32 times that of the developing world," says Diamond. "That means that one American is consuming like 32 Kenyans." The problem is not the number of Kenyans, the problem is when Kenyans or, more pressingly, big developing countries such as China, gain the ability to consume like Americans.
Can't humans simply increase the supply of resources as they have done before? "We can change the supply of some things if there is only one limiting resource. If it is food, then we can have a green revolution and produce more crops," he says. "Unfortunately, we need lots of resources. We need food, we need water. We are already using something like 70 or 80 per cent of the world's fresh water. So you say, 'Alright, we'll get around water by desalinating sea water.' But then there's the energy ceiling, and so on."
With a nod to the feast before us, I say there seems little chance that Chinese or Indians will forgo the opportunity to live a western-style existence. Why should they? It is even more improbable that westerners will give up their resource-hungry lifestyles. Diamond, for example, is not a vegetarian, though he knows a vegetable diet is less hard on the planet. "I'm inconsistent," he shrugs. But if we can't supply more or consume less, doesn't that mean that, like the Easter Islander who chopped down the last tree, thus condemning his civilisation to extinction, we are doomed to drain our oceans of fish and empty our soil of nutrients?
"No. It is our choice," he replies, perhaps subconsciously answering his critics again. "If we continue to operate non-sustainably, then in 50 or 60 years, the US and Japan and Europe will be in bad shape. But my friends in the highlands of New Guinea will be fine. Some of my friends made stone tools when they were children and they could just go back to what their ancestors were doing for 46,000 years. New Guinea highlanders are not doomed," he says, draining his pomegranate juice. "The first world lifestyle will be doomed if we don't learn to operate sustainably."
David Pilling is the FT's Asia editor
..................................................
Jared Diamond's house
Bel Air, Los Angeles
Chilled salmon
Orzo with bacon and spinach
Mixed roast vegetables
One avocado
One grapefruit
One pomegranate lychee green tea
Lots of pomegranate juice
FT.com print article (9 August 2009)
http://www.ft.com/cms/s/2/144fa854-82e2-11de-ab4a-00144feabdc0,dwp_uuid=e502ea62-6264-11da-8dad-0000779e2340,print=yes.html
http://snipurl.com/pirde
Friday, December 12, 2008
Reconsidering the Man From Illinois By EDWARD ROTHSTEIN
December 12, 2008
Exhibition Review | 'One Life: The Mask of Lincoln'
Reconsidering the Man From Illinois By EDWARD ROTHSTEIN
WASHINGTON — Two white plaster masks appear next to each other in a display case at the National Portrait Gallery here. One shows a middle-aged face with a firm, grim look — perhaps because the subject had to control his breathing as the sculptor waited for the substance to harden. The plaster eyes are scooped out, but you can glimpse the interior man in the subtle musculature of the jaw, the high cheekbones, the expansive, smooth brow. He is determined, vigorous and (we know) ambitious.
The other mask is of the same man's face, about five years later. It seems more of a death mask than one taken from life. Those years — between 1860, when this man, Abraham Lincoln, was beginning his campaign for president of the United States, and February 1865, when he was just two months away from being murdered — seem to have carved the flesh from his cheeks, hollowed out the eye sockets more decisively than any sculptor's thumb, and dug lines and pockets in aging, sallow flesh.
This modest exhibition of 30 images of Lincoln at the Portrait Gallery — "One Life: The Mask of Lincoln" — may turn out to be an understated highlight of Lincoln's coming bicentennial year, which promises a full harvest of academic conferences, exhibitions, the reopening of Ford's Theater and scores of new books, many offering revelations from freshly plumbed archives and analyses of figures major and minor. But the juxtaposition of these masks may remain one of the most potent, graphic images of the effects of the crucial years they frame.
They suggest, too, how closely our conceptions of Lincoln's public greatness are connected with our conception of his inner life, his empathy, his personal suffering. It is as if, in resuscitating the Union after the grievous bloodshed of the Civil War, Lincoln had bodily absorbed the nation's suffering — prefiguring the posthumous Christian iconography that developed after Lincoln's assassination on Good Friday.
"This war is eating my life out," Lincoln told a friend. "I have a strong impression that I shall not live to see the end."
In this small show, organized by the curator David C. Ward, images become more powerful than argument. What can be read in Lincoln's features — of his leadership of the Union, his milestone emancipation of slaves, his rededication of American ideals based on the inalienable rights proclaimed by the Declaration of Independence? Could another figure of his age have done the same?
There is some resemblance between Lincoln and Winston Churchill in Britain in 1941, during the blitz of London. Had Churchill not used his rhetorical gifts to strengthen and unite his citizenry and cabinet, defining the character of their island nation and outlining what was at stake, the course of the 20th century might have been different.
And had Lincoln not, with almost ruthless firmness, taken the ideal of the Union as the highest good and defended it with his own rhetorical gifts, had he not believed — as so few others did — that the stakes were worth the war's unprecedented horrors and sufferings, then the world's greatest experiment in self-government would have failed, and questions would have been raised, as Lincoln said, about whether any nation so conceived could long endure.
I have fallen under the spell of Lincoln, which means that for every book read, there are several lifetimes' worth of books to follow. It is a field in which there are so many opinions that no one could ever be lonely. I walk around hearing voices — though not, perhaps, the voices that Mary Todd Lincoln sought in White House séances after her 11-year-old son died.
I have been listening to audio books of recent Lincoln works: Fred Kaplan's "Lincoln: The Biography of a Writer" and Doris Kearns Goodwin's "Team of Rivals." I have even tried audio books of Lincoln's speeches, though I have not heard a speaker do justice to the rhythms and music of those late, condensed orations, like the Gettysburg Address or the Second Inaugural, in which Lincoln strips away all accident and incident, laying out the counterpoint of high principle.
The bicentennial will not allow much silence to intervene for contemplation of this man's open-minded, sad nobility, but no complaints here.
The historian James Oakes, who is a contributor to Eric Foner's valuable new anthology, "Our Lincoln: New Perspectives on Lincoln and His World," has suggested that for a time Lincoln historians paid attention to large, abstract forces, market conditions, abolition movements or other political pressures, but that in recent years attention to Lincoln has again become almost minutely personal.
Mr. Foner's anthology of academic essays strikes a balance between the personal and the abstract, and a daylong conference last month at Mr. Foner's home base, Columbia University, featured the book's contributors and was often exhilarating. But Lincoln the man looms largest and is likely to loom larger still with the inauguration of Barack Obama, who, like Lincoln, was once an Illinois state legislator.
Mr. Obama has so identified himself with Lincoln that he invoked him while announcing his candidacy in Lincoln's onetime political base, Springfield, Ill. He has suggested that his political career has been an extension of the arc of racial progress begun by Lincoln. In Mr. Obama's victory speech he quoted Lincoln's First Inaugural Address. The theme of Mr. Obama's own inauguration will be "A New Birth of Freedom," an allusion to the Gettysburg Address. And the president-elect has admiringly cited Ms. Goodwin's "Team of Rivals," saying he has been influenced by the way Lincoln composed his cabinet.
All of this heightens the relevance of the coming flood of Lincolniana. Coming in January is a much anticipated two-volume biography of Lincoln by Michael Burlingame, drawing on the author's discoveries of letters and newspaper writings (as well as a lost 1865 eulogy of Lincoln by Frederick Douglass).
Another new biography is imminent from Ronald C. White Jr. Lincoln's marriage to the manic Mary Todd is the subject of the recent book "The Lincolns" by Daniel Mark Epstein. She is made an even more sympathetic figure in "Mrs. Lincoln" by Catherine Clinton — though Mr. Burlingame's research will make further rehabilitation much more difficult.
Mr. Kaplan's book is a study of Lincoln's development as a writer. James M. McPherson's book is about Lincoln's military prowess, and Harold Holzer's account is of the months between Lincoln's election and his taking office in 1861 — months in which Southern secessions began.
Yet another new book, compiled by Philip B. Kunhardt III, Peter W. Kunhardt and Peter W. Kunhardt Jr. ("Looking for Lincoln: The Making of an American Icon"), is an illustrated history of Lincoln's posthumous image. The Library of America, in "The Lincoln Anthology," is doing something similar in prose: Mr. Holzer compiles almost 150 years of reactions to Lincoln by writers ranging from Horace Greeley and Nathaniel Hawthorne to E. L. Doctorow and Mr. Obama.
Yet for all the detail, the probing and the analysis, something remains uncanny. If Lincoln had died in 1860, we probably wouldn't remember him. He had failed to gain much political power during his one term in Congress beginning in 1847; he lost the 1858 election to the Senate; and while he was a diligent party man and lawyer, his legislative track record was not terribly distinguished. He was last out of four Republicans in line to get the party's nomination in 1860.
He would have a legacy of a few good speeches and some powerful argument in the debates with his rival, Stephen A. Douglas, but it would have been a career far less influential than that of the antislavery politician of the previous generation whom Lincoln most admired, Henry Clay.
So how is it that, within five years, Lincoln ended up worthy of Secretary of War Edwin M. Stanton's comment on his death, "Now he belongs to the ages"? The closer you look, combing through these mountains of material, the more ambiguities appear.
Beginning in the 1960s, for example, Lincoln's stature was knocked down a few notches; he had equivocated about some issues for which he is now most admired. In one debate with Douglas, for instance, he was eager to reassure the audience that he had no intention of urging "political and social equality between the white and the black races."
And at first, ending slavery was not one of Lincoln's goals in the Civil War. In 1862 Lincoln said in a letter to Greeley that his ambition was to save the Union, which he would do "without freeing any slave" or "by freeing all the slaves" or "by freeing some and letting others alone." And his grand scheme for freed slaves? Initially they were to be encouraged to migrate to a special colony in Africa.
As for the elegiac prose of his great speeches, where are they anticipated in the many stiff and uninspiring speeches of his earlier life or in his reputation for off-color joviality? Mr. Holzer points out that The New York Daily News mocked the president-elect as an "inveterate old anecdote monger."
"Is the precious time of Cabinet Councils to be wasted with stories?" the paper asked. "Will he go down to South Carolina and assuage her wrath" with an anecdote? It is almost as if there were no connections between the lawyer in Springfield and the president in Washington.
Of course, that is an exaggeration. Continuities abound. But what happened is still remarkable. Lincoln had a tragic vision of the world; he grew up surrounded by familial death and disregard; his marriage was difficult; two children died; his career was pockmarked by failures. He suffered greatly but acted as if he had a right not to happiness itself, but only to its pursuit.
As in life, so in government. He believed that political compromise was the motor of democratic life. And the biggest compromises at America's founding were those involving slavery. It was only by allowing slavery into the Constitution that the Constitution was made possible; it was only by settling for containment rather than elimination that the better angels of early America could even create a United States.
Lincoln, though, rose to the presidency at the very moment when that tragic compromise failed. So in this respect, the flexible politician became an absolutist. There was, in his mind, a fundamental principle that could not be abandoned: the Union. He cleaved fiercely — almost fanatically — to it because it already was a compromise, though one generated out of an ideal toward which the nation would have to move.
That conviction forced him to refine his thinking and discipline his actions. In a debate with Douglas, Lincoln referred to an "eternal struggle between these two principles — right and wrong — throughout the world." The wrong, he said, was "the divine right of kings." The right was "the common right of humanity." The notion of "divine right" left a stain in the form of American slavery; the notion of "common right" was America's founding principle.
Those inalienable rights of humanity could be guaranteed only by something like the Union, so even when it came to abolishing slavery, Lincoln was cautious and protective, hewing strictly to the Constitution, knowing the wrong could be fully undone only with an amendment, but believing, finally, that he could at least, as commander in chief in time of war, free slaves in the rebellious territories. The Emancipation Proclamation is written in stolid, legalistic prose in which all of Lincoln's rhetorical gifts are shunted aside. That too was done in service to the Union.
Then he was freed to define his larger vision. Andrew Delbanco, in Mr. Foner's anthology, argues that the Civil War, for all its trauma, was unlike many other wars in that it did not produce a crisis that left the country without a sense of purpose. That is because, he suggests, Lincoln found "transcendent meaning in the carnage" and affirmed that meaning for both sides. He really became another founding father.
Look finally, in the National Gallery, at the Alexander Gardner photograph taken soon after the late-life mask was made, less than two months before Lincoln's death. A crack shattered the glass plate, its scar running, almost prophetically, across the top of Lincoln's head. The president's left eye is in finely etched focus, gazing off in deep introspection, while the rest of the face softens into a gentle blur. Lincoln's eye, surely, has seen much that haunts him.
But on Lincoln's mouth are the hints of an enigmatic smile, as if in the closing weeks of the war, Lincoln saw, despite the struggles to come, a sign of what might be. The clarity of his gaze and the promise of his smile remain.
http://www.nytimes.com/2008/12/12/arts/design/12linc.html?sq=Rothstein&st=cse&scp=1&pagewanted=print
http://snipurl.com/83lgu
Abraham Lincoln Navigator
A list of resources from around the Web about Abraham Lincoln as selected by researchers and editors of The New York Times.
Other Content
* Abraham Lincoln Speeches
* From AmericanRhetoric.com
* American Presidents: Abraham Lincoln
* Miller Center of Public Affairs at the University of Virginia: essays, speeches, links
* Abraham Lincoln Papers
* From the Library of Congress
* Lincoln Studies Center
* At Knox College
* "The Time of the Lincolns"
* PBS/American Experience
* "The True Lincoln"
* Time magazine. June 26, 2005.
BOOKS
* "Abraham Lincoln: Speeches and Writings" Library of America edition
* By Abraham Lincoln
* "Lincoln: Biography of a Writer" (2008)
* By Fred Kaplan
* "Lincoln's Sword" (2006)
* By Douglas L. Wilson
* "Team of Rivals: The Political Genius of Abraham Lincoln" (2005)
* By Doris Kearns Goodwin
* "Honor's Voice: The Transformation of Abraham Lincoln" (1998)
* By Douglas L. Wilson
* "Lincoln" (1995)
* By David Herbert Donald
* "Lincoln in American Memory" (1994)
* By Merrill D. Peterson
* "Lincoln at Gettysburg: The Words That Remade America" (1992)
* By Garry Wills
* "Abraham Lincoln and the Second American Revolution" (1991)
* By James M. McPherson
* "With Malice Toward None: The Life of Abraham Lincoln" (1977)
* Stephen B. Oates
* "Life of Lincoln" (1889)
* By William H. Herndon and Jesse W. Welk
From the Archive
Now, browse the expanded New York Times Archive back to 1851.
TimesSelect The First Inauguration Ceremony (Mar. 5, 1861)
TimesSelect Emancipation Proclamation(Jan. 3, 1863)
TimesSelect Gettysburg Address (Nov. 20, 1863)
TimesSelect Second Inauguration (Mar. 5, 1865)
TimesSelect President Lincoln Shot (Apr. 15, 1865)
TimesSelect A Look at Lincoln's Legacy (Feb. 1, 1909)
http://topics.nytimes.com/top/reference/timestopics/people/l/abraham_lincoln/index.html
http://snipurl.com/83llf
With the coming of Abraham Lincoln's bicentennial year in 2009, there will be a flood of academic conferences, exhibitions, the reopening of Ford's Theater and scores of new books, many of them offering revelations from freshly plumbed archives and analyses of figures major and minor.
The historian James Oakes, who is a contributor to Eric Foner's valuable anthology, "Our Lincoln: New Perspectives on Lincoln and His World" (October 2008), has suggested that for a time Lincoln historians paid attention to large, abstract forces, market conditions, abolition movements or other political pressures, but that in recent years attention to Lincoln has again become almost minutely personal.
Lincoln the man is likely to loom larger still with the inauguration of Barack Obama, who, like Lincoln, was once an Illinois state legislator. Mr. Obama has so identified himself with Lincoln that he invoked him while announcing his candidacy in Lincoln's onetime political base, Springfield, Ill. He has suggested that his political career has been an extension of the arc of racial progress begun by Lincoln.
Lincoln, the 16th president of the United States, was born in Hodgenville, Ky., in 1809 in a log cabin and accumulated barely a year of formal education while growing up. Family moves took him to Indiana and then to Illinois by the time he was 21. A failed storekeeper, Lincoln worked at odd jobs while he taught himself law, sometimes walking 20 miles to borrow books.
He was elected to the Illinois state legislature as a Whig in 1834 and to Congress in 1846. He unsuccessfully ran for the Senate in 1858, drawing national attention in debates with Stephen A. Douglas, the nation's leading Democrat. He was rewarded with the Republican Party's nomination for president in 1860, and defeated three opponents to win the general election.
As Southern states left the Union, Lincoln preached conciliation, although he vowed to crush secession. War ensued when South Carolina Confederates bombarded the federal garrison at Fort Sumter. After early reverses in the Civil War, Lincoln decided that slavery had to be abolished to restore the Union, and he issued the Emancipation Proclamation in 1862.
Five days after the war's end, Lincoln was assassinated by John Wilkes Booth, an arch-Confederate. Lincoln's prestige has grown with time, until many have come to regard him as the nation's greatest president.
http://topics.nytimes.com/top/reference/timestopics/people/l/abraham_lincoln/index.html
http://snipurl.com/83llf
Exhibition Review | 'One Life: The Mask of Lincoln'
Reconsidering the Man From Illinois By EDWARD ROTHSTEIN
WASHINGTON — Two white plaster masks appear next to each other in a display case at the National Portrait Gallery here. One shows a middle-aged face with a firm, grim look — perhaps because the subject had to control his breathing as the sculptor waited for the substance to harden. The plaster eyes are scooped out, but you can glimpse the interior man in the subtle musculature of the jaw, the high cheekbones, the expansive, smooth brow. He is determined, vigorous and (we know) ambitious.
The other mask is of the same man's face, about five years later. It seems more of a death mask than one taken from life. Those years — between 1860, when this man, Abraham Lincoln, was beginning his campaign for president of the United States, and February 1865, when he was just two months away from being murdered — seem to have carved the flesh from his cheeks, hollowed out the eye sockets more decisively than any sculptor's thumb, and dug lines and pockets in aging, sallow flesh.
This modest exhibition of 30 images of Lincoln at the Portrait Gallery — "One Life: The Mask of Lincoln" — may turn out to be an understated highlight of Lincoln's coming bicentennial year, which promises a full harvest of academic conferences, exhibitions, the reopening of Ford's Theater and scores of new books, many offering revelations from freshly plumbed archives and analyses of figures major and minor. But the juxtaposition of these masks may remain one of the most potent, graphic images of the effects of the crucial years they frame.
They suggest, too, how closely our conceptions of Lincoln's public greatness are connected with our conception of his inner life, his empathy, his personal suffering. It is as if, in resuscitating the Union after the grievous bloodshed of the Civil War, Lincoln had bodily absorbed the nation's suffering — prefiguring the posthumous Christian iconography that developed after Lincoln's assassination on Good Friday.
"This war is eating my life out," Lincoln told a friend. "I have a strong impression that I shall not live to see the end."
In this small show, organized by the curator David C. Ward, images become more powerful than argument. What can be read in Lincoln's features — of his leadership of the Union, his milestone emancipation of slaves, his rededication of American ideals based on the inalienable rights proclaimed by the Declaration of Independence? Could another figure of his age have done the same?
There is some resemblance between Lincoln and Winston Churchill in Britain in 1941, during the blitz of London. Had Churchill not used his rhetorical gifts to strengthen and unite his citizenry and cabinet, defining the character of their island nation and outlining what was at stake, the course of the 20th century might have been different.
And had Lincoln not, with almost ruthless firmness, taken the ideal of the Union as the highest good and defended it with his own rhetorical gifts, had he not believed — as so few others did — that the stakes were worth the war's unprecedented horrors and sufferings, then the world's greatest experiment in self-government would have failed, and questions would have been raised, as Lincoln said, about whether any nation so conceived could long endure.
I have fallen under the spell of Lincoln, which means that for every book read, there are several lifetimes' worth of books to follow. It is a field in which there are so many opinions that no one could ever be lonely. I walk around hearing voices — though not, perhaps, the voices that Mary Todd Lincoln sought in White House séances after her 11-year-old son died.
I have been listening to audio books of recent Lincoln works: Fred Kaplan's "Lincoln: The Biography of a Writer" and Doris Kearns Goodwin's "Team of Rivals." I have even tried audio books of Lincoln's speeches, though I have not heard a speaker do justice to the rhythms and music of those late, condensed orations, like the Gettysburg Address or the Second Inaugural, in which Lincoln strips away all accident and incident, laying out the counterpoint of high principle.
The bicentennial will not allow much silence to intervene for contemplation of this man's open-minded, sad nobility, but no complaints here.
The historian James Oakes, who is a contributor to Eric Foner's valuable new anthology, "Our Lincoln: New Perspectives on Lincoln and His World," has suggested that for a time Lincoln historians paid attention to large, abstract forces, market conditions, abolition movements or other political pressures, but that in recent years attention to Lincoln has again become almost minutely personal.
Mr. Foner's anthology of academic essays strikes a balance between the personal and the abstract, and a daylong conference last month at Mr. Foner's home base, Columbia University, featured the book's contributors and was often exhilarating. But Lincoln the man looms largest and is likely to loom larger still with the inauguration of Barack Obama, who, like Lincoln, was once an Illinois state legislator.
Mr. Obama has so identified himself with Lincoln that he invoked him while announcing his candidacy in Lincoln's onetime political base, Springfield, Ill. He has suggested that his political career has been an extension of the arc of racial progress begun by Lincoln. In Mr. Obama's victory speech he quoted Lincoln's First Inaugural Address. The theme of Mr. Obama's own inauguration will be "A New Birth of Freedom," an allusion to the Gettysburg Address. And the president-elect has admiringly cited Ms. Goodwin's "Team of Rivals," saying he has been influenced by the way Lincoln composed his cabinet.
All of this heightens the relevance of the coming flood of Lincolniana. Coming in January is a much anticipated two-volume biography of Lincoln by Michael Burlingame, drawing on the author's discoveries of letters and newspaper writings (as well as a lost 1865 eulogy of Lincoln by Frederick Douglass).
Another new biography is imminent from Ronald C. White Jr. Lincoln's marriage to the manic Mary Todd is the subject of the recent book "The Lincolns" by Daniel Mark Epstein. She is made an even more sympathetic figure in "Mrs. Lincoln" by Catherine Clinton — though Mr. Burlingame's research will make further rehabilitation much more difficult.
Mr. Kaplan's book is a study of Lincoln's development as a writer. James M. McPherson's book is about Lincoln's military prowess, and Harold Holzer's account is of the months between Lincoln's election and his taking office in 1861 — months in which Southern secessions began.
Yet another new book, compiled by Philip B. Kunhardt III, Peter W. Kunhardt and Peter W. Kunhardt Jr. ("Looking for Lincoln: The Making of an American Icon"), is an illustrated history of Lincoln's posthumous image. The Library of America, in "The Lincoln Anthology," is doing something similar in prose: Mr. Holzer compiles almost 150 years of reactions to Lincoln by writers ranging from Horace Greeley and Nathaniel Hawthorne to E. L. Doctorow and Mr. Obama.
Yet for all the detail, the probing and the analysis, something remains uncanny. If Lincoln had died in 1860, we probably wouldn't remember him. He had failed to gain much political power during his one term in Congress beginning in 1847; he lost the 1858 election to the Senate; and while he was a diligent party man and lawyer, his legislative track record was not terribly distinguished. He was last out of four Republicans in line to get the party's nomination in 1860.
He would have a legacy of a few good speeches and some powerful argument in the debates with his rival, Stephen A. Douglas, but it would have been a career far less influential than that of the antislavery politician of the previous generation whom Lincoln most admired, Henry Clay.
So how is it that, within five years, Lincoln ended up worthy of Secretary of War Edwin M. Stanton's comment on his death, "Now he belongs to the ages"? The closer you look, combing through these mountains of material, the more ambiguities appear.
Beginning in the 1960s, for example, Lincoln's stature was knocked down a few notches; he had equivocated about some issues for which he is now most admired. In one debate with Douglas, for instance, he was eager to reassure the audience that he had no intention of urging "political and social equality between the white and the black races."
And at first, ending slavery was not one of Lincoln's goals in the Civil War. In 1862 Lincoln said in a letter to Greeley that his ambition was to save the Union, which he would do "without freeing any slave" or "by freeing all the slaves" or "by freeing some and letting others alone." And his grand scheme for freed slaves? Initially they were to be encouraged to migrate to a special colony in Africa.
As for the elegiac prose of his great speeches, where are they anticipated in the many stiff and uninspiring speeches of his earlier life or in his reputation for off-color joviality? Mr. Holzer points out that The New York Daily News mocked the president-elect as an "inveterate old anecdote monger."
"Is the precious time of Cabinet Councils to be wasted with stories?" the paper asked. "Will he go down to South Carolina and assuage her wrath" with an anecdote? It is almost as if there were no connections between the lawyer in Springfield and the president in Washington.
Of course, that is an exaggeration. Continuities abound. But what happened is still remarkable. Lincoln had a tragic vision of the world; he grew up surrounded by familial death and disregard; his marriage was difficult; two children died; his career was pockmarked by failures. He suffered greatly but acted as if he had a right not to happiness itself, but only to its pursuit.
As in life, so in government. He believed that political compromise was the motor of democratic life. And the biggest compromises at America's founding were those involving slavery. It was only by allowing slavery into the Constitution that the Constitution was made possible; it was only by settling for containment rather than elimination that the better angels of early America could even create a United States.
Lincoln, though, rose to the presidency at the very moment when that tragic compromise failed. So in this respect, the flexible politician became an absolutist. There was, in his mind, a fundamental principle that could not be abandoned: the Union. He cleaved fiercely — almost fanatically — to it because it already was a compromise, though one generated out of an ideal toward which the nation would have to move.
That conviction forced him to refine his thinking and discipline his actions. In a debate with Douglas, Lincoln referred to an "eternal struggle between these two principles — right and wrong — throughout the world." The wrong, he said, was "the divine right of kings." The right was "the common right of humanity." The notion of "divine right" left a stain in the form of American slavery; the notion of "common right" was America's founding principle.
Those inalienable rights of humanity could be guaranteed only by something like the Union, so even when it came to abolishing slavery, Lincoln was cautious and protective, hewing strictly to the Constitution, knowing the wrong could be fully undone only with an amendment, but believing, finally, that he could at least, as commander in chief in time of war, free slaves in the rebellious territories. The Emancipation Proclamation is written in stolid, legalistic prose in which all of Lincoln's rhetorical gifts are shunted aside. That too was done in service to the Union.
Then he was freed to define his larger vision. Andrew Delbanco, in Mr. Foner's anthology, argues that the Civil War, for all its trauma, was unlike many other wars in that it did not produce a crisis that left the country without a sense of purpose. That is because, he suggests, Lincoln found "transcendent meaning in the carnage" and affirmed that meaning for both sides. He really became another founding father.
Look finally, in the National Gallery, at the Alexander Gardner photograph taken soon after the late-life mask was made, less than two months before Lincoln's death. A crack shattered the glass plate, its scar running, almost prophetically, across the top of Lincoln's head. The president's left eye is in finely etched focus, gazing off in deep introspection, while the rest of the face softens into a gentle blur. Lincoln's eye, surely, has seen much that haunts him.
But on Lincoln's mouth are the hints of an enigmatic smile, as if in the closing weeks of the war, Lincoln saw, despite the struggles to come, a sign of what might be. The clarity of his gaze and the promise of his smile remain.
http://www.nytimes.com/2008/12/12/arts/design/12linc.html?sq=Rothstein&st=cse&scp=1&pagewanted=print
http://snipurl.com/83lgu
Abraham Lincoln Navigator
A list of resources from around the Web about Abraham Lincoln as selected by researchers and editors of The New York Times.
Other Content
* Abraham Lincoln Speeches
* From AmericanRhetoric.com
* American Presidents: Abraham Lincoln
* Miller Center of Public Affairs at the University of Virginia: essays, speeches, links
* Abraham Lincoln Papers
* From the Library of Congress
* Lincoln Studies Center
* At Knox College
* "The Time of the Lincolns"
* PBS/American Experience
* "The True Lincoln"
* Time magazine. June 26, 2005.
BOOKS
* "Abraham Lincoln: Speeches and Writings" Library of America edition
* By Abraham Lincoln
* "Lincoln: Biography of a Writer" (2008)
* By Fred Kaplan
* "Lincoln's Sword" (2006)
* By Douglas L. Wilson
* "Team of Rivals: The Political Genius of Abraham Lincoln" (2005)
* By Doris Kearns Goodwin
* "Honor's Voice: The Transformation of Abraham Lincoln" (1998)
* By Douglas L. Wilson
* "Lincoln" (1995)
* By David Herbert Donald
* "Lincoln in American Memory" (1994)
* By Merrill D. Peterson
* "Lincoln at Gettysburg: The Words That Remade America" (1992)
* By Garry Wills
* "Abraham Lincoln and the Second American Revolution" (1991)
* By James M. McPherson
* "With Malice Toward None: The Life of Abraham Lincoln" (1977)
* Stephen B. Oates
* "Life of Lincoln" (1889)
* By William H. Herndon and Jesse W. Welk
From the Archive
Now, browse the expanded New York Times Archive back to 1851.
TimesSelect The First Inauguration Ceremony (Mar. 5, 1861)
TimesSelect Emancipation Proclamation(Jan. 3, 1863)
TimesSelect Gettysburg Address (Nov. 20, 1863)
TimesSelect Second Inauguration (Mar. 5, 1865)
TimesSelect President Lincoln Shot (Apr. 15, 1865)
TimesSelect A Look at Lincoln's Legacy (Feb. 1, 1909)
http://topics.nytimes.com/top/reference/timestopics/people/l/abraham_lincoln/index.html
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With the coming of Abraham Lincoln's bicentennial year in 2009, there will be a flood of academic conferences, exhibitions, the reopening of Ford's Theater and scores of new books, many of them offering revelations from freshly plumbed archives and analyses of figures major and minor.
The historian James Oakes, who is a contributor to Eric Foner's valuable anthology, "Our Lincoln: New Perspectives on Lincoln and His World" (October 2008), has suggested that for a time Lincoln historians paid attention to large, abstract forces, market conditions, abolition movements or other political pressures, but that in recent years attention to Lincoln has again become almost minutely personal.
Lincoln the man is likely to loom larger still with the inauguration of Barack Obama, who, like Lincoln, was once an Illinois state legislator. Mr. Obama has so identified himself with Lincoln that he invoked him while announcing his candidacy in Lincoln's onetime political base, Springfield, Ill. He has suggested that his political career has been an extension of the arc of racial progress begun by Lincoln.
Lincoln, the 16th president of the United States, was born in Hodgenville, Ky., in 1809 in a log cabin and accumulated barely a year of formal education while growing up. Family moves took him to Indiana and then to Illinois by the time he was 21. A failed storekeeper, Lincoln worked at odd jobs while he taught himself law, sometimes walking 20 miles to borrow books.
He was elected to the Illinois state legislature as a Whig in 1834 and to Congress in 1846. He unsuccessfully ran for the Senate in 1858, drawing national attention in debates with Stephen A. Douglas, the nation's leading Democrat. He was rewarded with the Republican Party's nomination for president in 1860, and defeated three opponents to win the general election.
As Southern states left the Union, Lincoln preached conciliation, although he vowed to crush secession. War ensued when South Carolina Confederates bombarded the federal garrison at Fort Sumter. After early reverses in the Civil War, Lincoln decided that slavery had to be abolished to restore the Union, and he issued the Emancipation Proclamation in 1862.
Five days after the war's end, Lincoln was assassinated by John Wilkes Booth, an arch-Confederate. Lincoln's prestige has grown with time, until many have come to regard him as the nation's greatest president.
http://topics.nytimes.com/top/reference/timestopics/people/l/abraham_lincoln/index.html
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Tuesday, November 18, 2008
A British Lesson on Auto Bailouts By NELSON D. SCHWARTZ
The New York Times
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November 18, 2008
A British Lesson on Auto Bailouts By NELSON D. SCHWARTZ
PARIS — A faltering auto giant whose brands are synonymous with the open road. Hundreds of thousands of unionized workers with powerful political backers. An urgent plea for the government to write a virtual blank check.
This is not the story of Ford and General Motors, but British Leyland, a car company that went through £11 billion of inflation-adjusted British taxpayer money, or $16.5 billion, in the ’70s and ’80s before going out of business. All that is left of the company now are memories of cars like the Triumph, and a painful lesson in the limited effectiveness of bailouts.
“It’s all too evocative,” said Leon Brittan, a top official in the government of Margaret Thatcher, the free-market-minded prime minister who nevertheless backed the rescue. “I’m not telling the U.S. what to do, but the lessons of the British experience is don’t throw good money after bad. British Leyland carried on for a few more years, but they’re not there now, are they?”
Other experts are sounding the same alarm. “The British Leyland experience is a relevant and cautionary one,” said John Casesa, a principal in the automotive consulting firm Casesa Shapiro Group in New York. “The government got in the business of trying to make a winner out of a structurally flawed company. That’s the risk in the U.S. as well.”
Though Continental automakers have fared better than British ones, Mr. Casesa argues that the long history of government support in Europe made companies like Renault and Fiat strong players in their home markets, but not worldwide.
“With the exception of BMW and Mercedes, European automakers haven’t been globally successful,” he said. “Nor have they been hugely profitable.”
That comparative history is receiving new attention as Congress turns its attention this week to the fate of Detroit.
The British Leyland bailout remains the classic example of a futile government intervention. The tight cooperation between governments and automakers on the Continent has produced happier results.
For half a century after World War II, the French government was the majority stakeholder in Renault, and Paris still holds a 15 percent stake in the company. In the 1980s, the company received a bailout equal to nearly 4 billion euros, or $5.1 billion in today’s money. Now it is highly profitable — at least compared with its American counterparts.
Today, G.M.’s German subsidiary, Opel, is appealing to Berlin for help, seeking more than 1 billion euros in credit guarantees, according to Carl-Peter Forster, G.M.’s European chief.
Monday, Chancellor Angela Merkel of Germany said her government would make a decision before Christmas.
“It’s not decided yet whether these loan guarantees will become necessary,” Mrs. Merkel told reporters in Berlin after meeting with Mr. Forster and other management and labor officials.
“If these guarantees become necessary, those funds should remain within Opel” in Germany, she added, echoing a concern some Americans have expressed that any United States bailout money go only to American automakers.
So far, Asian companies have not complained that such a bailout would amount to an anticompetitive subsidy. But José Manuel Barroso, president of the European Commission, said last week that he thought an aid package for Detroit could be “illegal” under World Trade Organization rules.
That has not stopped European automakers from seeking 40 billion euros in loans from the European Investment Bank, ostensibly to help develop cleaner cars.
For Garel Rhys, head of the Center for Automotive Industry Research at Cardiff University in Wales, the trajectory of General Motors is reminiscent of British Leyland not only because of the former’s decision to seek aid to avert bankruptcy, but also for its slow, seemingly inexorable loss of market share. “Both had a history of being the biggest in their market but couldn’t adapt as they lost sales,” he said. “They couldn’t get customers back.”
Historically, British Leyland’s roots stretched back further than Henry Ford’s Model T. The company controlled 36 percent of the British market well into the 1970s, with mass-market brands like Austin and Morris and premium lines like MG and Jaguar. But rising competition from Japanese and German automakers, shoddy workmanship and a breakdown in labor relations brought the company to near bankruptcy by 1975, Mr. Rhys said.
Michael Edwardes, who took over as British Leyland’s chief executive in November 1977, recalled that when he joined, no one even knew whether individual brands were profitable. “It was a farce — no one knew what the costs were,” he said.
As it turned out, every MG the company sold in the United States resulted in a loss of $2,000 for British Leyland.
Wildcat strikes consumed more than 32 million worker-hours in 1977, and the company became a symbol of labor strife, with some employees walking out the door with spark plugs in their coat pockets and engines in the trunks of their cars, Mr. Edwardes said.
Mr. Edwardes immediately began reducing the company’s work force of roughly 200,000 — to 104,000 within five years — and closing 19 factories. He appealed to the Thatcher government for aid, arguing the money was needed if British Leyland was going to be able to afford to lay off workers while investing in new models.
Eventually, the government put up £3.6 billion, equal to £11 billion in today’s money. But the rescue did not do much to preserve British Leyland’s labor force or market share in the long term.
By the time it received its last government infusion of cash in 1988, Mr. Rhys said, British Leyland’s market share had slumped to 15 percent. British Leyland evolved into MG Rover, which was eventually acquired by BMW, then spun off, finally going bankrupt in 2005.
According to Mr. Rhys, just 22,000 workers remain at British Leyland’s successor companies, about 10 percent of its work force in the mid-1970s.
“It was a very poor return,” he said. “We felt collectively and nationally that we got our fingers burnt, and this was always used as a reason to avoid bailouts, both by Labor and Conservative governments in Britain.”
Mr. Edwardes still defends the government aid, arguing it preserved parts of the company that remain in business now — like Jaguar and Land Rover, which were bought by Ford.
Jaguar never made a profit for Ford, however, and was sold with Land Rover to Tata Motors of India earlier this year. Ford recouped only about half of what it paid to acquire the two brands, and is estimated to have poured $10 billion into Jaguar.
Despite the British experience, the case of Renault, which combined fresh money and new management in the 1980s, showed that government bailouts can be beneficial.
The French government help for Renault also came amid increasing losses for the company. But Mr. Rhys said that unlike British Leyland, Renault was able to use the financing to create new car models that were ultimately successful. That, along with tough cost-cutting by a newly installed chairman, cleared the road to profitability by the time the government began privatizing Renault in the 1990s.
If Washington does go ahead and help Detroit, Mr. Edwardes said, it is crucial that the government overhaul the management of the Big Three. “Throwing money at them isn’t enough,” he said. “They need money and they need new management. They need both, not one or the other.”
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November 18, 2008
A British Lesson on Auto Bailouts By NELSON D. SCHWARTZ
PARIS — A faltering auto giant whose brands are synonymous with the open road. Hundreds of thousands of unionized workers with powerful political backers. An urgent plea for the government to write a virtual blank check.
This is not the story of Ford and General Motors, but British Leyland, a car company that went through £11 billion of inflation-adjusted British taxpayer money, or $16.5 billion, in the ’70s and ’80s before going out of business. All that is left of the company now are memories of cars like the Triumph, and a painful lesson in the limited effectiveness of bailouts.
“It’s all too evocative,” said Leon Brittan, a top official in the government of Margaret Thatcher, the free-market-minded prime minister who nevertheless backed the rescue. “I’m not telling the U.S. what to do, but the lessons of the British experience is don’t throw good money after bad. British Leyland carried on for a few more years, but they’re not there now, are they?”
Other experts are sounding the same alarm. “The British Leyland experience is a relevant and cautionary one,” said John Casesa, a principal in the automotive consulting firm Casesa Shapiro Group in New York. “The government got in the business of trying to make a winner out of a structurally flawed company. That’s the risk in the U.S. as well.”
Though Continental automakers have fared better than British ones, Mr. Casesa argues that the long history of government support in Europe made companies like Renault and Fiat strong players in their home markets, but not worldwide.
“With the exception of BMW and Mercedes, European automakers haven’t been globally successful,” he said. “Nor have they been hugely profitable.”
That comparative history is receiving new attention as Congress turns its attention this week to the fate of Detroit.
The British Leyland bailout remains the classic example of a futile government intervention. The tight cooperation between governments and automakers on the Continent has produced happier results.
For half a century after World War II, the French government was the majority stakeholder in Renault, and Paris still holds a 15 percent stake in the company. In the 1980s, the company received a bailout equal to nearly 4 billion euros, or $5.1 billion in today’s money. Now it is highly profitable — at least compared with its American counterparts.
Today, G.M.’s German subsidiary, Opel, is appealing to Berlin for help, seeking more than 1 billion euros in credit guarantees, according to Carl-Peter Forster, G.M.’s European chief.
Monday, Chancellor Angela Merkel of Germany said her government would make a decision before Christmas.
“It’s not decided yet whether these loan guarantees will become necessary,” Mrs. Merkel told reporters in Berlin after meeting with Mr. Forster and other management and labor officials.
“If these guarantees become necessary, those funds should remain within Opel” in Germany, she added, echoing a concern some Americans have expressed that any United States bailout money go only to American automakers.
So far, Asian companies have not complained that such a bailout would amount to an anticompetitive subsidy. But José Manuel Barroso, president of the European Commission, said last week that he thought an aid package for Detroit could be “illegal” under World Trade Organization rules.
That has not stopped European automakers from seeking 40 billion euros in loans from the European Investment Bank, ostensibly to help develop cleaner cars.
For Garel Rhys, head of the Center for Automotive Industry Research at Cardiff University in Wales, the trajectory of General Motors is reminiscent of British Leyland not only because of the former’s decision to seek aid to avert bankruptcy, but also for its slow, seemingly inexorable loss of market share. “Both had a history of being the biggest in their market but couldn’t adapt as they lost sales,” he said. “They couldn’t get customers back.”
Historically, British Leyland’s roots stretched back further than Henry Ford’s Model T. The company controlled 36 percent of the British market well into the 1970s, with mass-market brands like Austin and Morris and premium lines like MG and Jaguar. But rising competition from Japanese and German automakers, shoddy workmanship and a breakdown in labor relations brought the company to near bankruptcy by 1975, Mr. Rhys said.
Michael Edwardes, who took over as British Leyland’s chief executive in November 1977, recalled that when he joined, no one even knew whether individual brands were profitable. “It was a farce — no one knew what the costs were,” he said.
As it turned out, every MG the company sold in the United States resulted in a loss of $2,000 for British Leyland.
Wildcat strikes consumed more than 32 million worker-hours in 1977, and the company became a symbol of labor strife, with some employees walking out the door with spark plugs in their coat pockets and engines in the trunks of their cars, Mr. Edwardes said.
Mr. Edwardes immediately began reducing the company’s work force of roughly 200,000 — to 104,000 within five years — and closing 19 factories. He appealed to the Thatcher government for aid, arguing the money was needed if British Leyland was going to be able to afford to lay off workers while investing in new models.
Eventually, the government put up £3.6 billion, equal to £11 billion in today’s money. But the rescue did not do much to preserve British Leyland’s labor force or market share in the long term.
By the time it received its last government infusion of cash in 1988, Mr. Rhys said, British Leyland’s market share had slumped to 15 percent. British Leyland evolved into MG Rover, which was eventually acquired by BMW, then spun off, finally going bankrupt in 2005.
According to Mr. Rhys, just 22,000 workers remain at British Leyland’s successor companies, about 10 percent of its work force in the mid-1970s.
“It was a very poor return,” he said. “We felt collectively and nationally that we got our fingers burnt, and this was always used as a reason to avoid bailouts, both by Labor and Conservative governments in Britain.”
Mr. Edwardes still defends the government aid, arguing it preserved parts of the company that remain in business now — like Jaguar and Land Rover, which were bought by Ford.
Jaguar never made a profit for Ford, however, and was sold with Land Rover to Tata Motors of India earlier this year. Ford recouped only about half of what it paid to acquire the two brands, and is estimated to have poured $10 billion into Jaguar.
Despite the British experience, the case of Renault, which combined fresh money and new management in the 1980s, showed that government bailouts can be beneficial.
The French government help for Renault also came amid increasing losses for the company. But Mr. Rhys said that unlike British Leyland, Renault was able to use the financing to create new car models that were ultimately successful. That, along with tough cost-cutting by a newly installed chairman, cleared the road to profitability by the time the government began privatizing Renault in the 1990s.
If Washington does go ahead and help Detroit, Mr. Edwardes said, it is crucial that the government overhaul the management of the Big Three. “Throwing money at them isn’t enough,” he said. “They need money and they need new management. They need both, not one or the other.”
Thursday, October 02, 2008
Daring to Say Loans Made No Sense By DAVID CARR
September 29, 2008
The Media Equation
Daring to Say Loans Made No Sense By DAVID CARR
Sometimes, if you want the real answer, you have to ask a dumb question.
Alex Blumberg, a producer at “This American Life,” a public radio show that specializes in old-fashioned storytelling about local slices of Americana, has never owned a house or had a mortgage, let alone covered the financial industry. Nonetheless, he was fascinated as he watched the subprime mess unfold.
His dumb question? “Why are they lending money to people who can’t afford to pay it back?”
In 2006, Mr. Blumberg began bothering his friend Adam Davidson, an experienced business reporter at National Public Radio, about subprime loans. Mr. Davidson, who had a broad knowledge of global capital markets, patiently walked him through collateralized debt obligations, yield and risk curves, and the growing amount of international capital in need of a home. But Mr. Blumberg still didn’t get it. How could securities based on lending money to bad risks be good business?
“I was embarrassed for him,” Mr. Davidson said. “I understood how money flowed around the world and I was talking to big-picture thinkers.”
Soon, Mr. Blumberg was madly surfing the Web and torturing his wife and friends with arcane talk about loan syndication and credit-default swaps. “It was a very unhealthy obsession,” he says now. “I just couldn’t understand how they could expect to be paid off when everyone I knew was maxed out on their credit cards. And these were very big loans.”
He decided to do the story for “This American Life,” a show that has a reputation for discussing things like summer camp and inner demons.
“I told him, I don’t know how you’re going to do a story about mortgage securitization for ‘This American Life,’ but good luck,” Mr. Davidson said. But by December of last year, both Mr. Davidson and the broader markets were beginning to have their doubts about whether the fallout from subprime lending had actually been contained.
The more they talked, the more Mr. Davidson realized the education was going both ways. They eventually came up with a one-hour collaboration between NPR News and “This American Life” called “The Giant Pool of Money” that was broadcast last May and became a much downloaded primer on all the mayhem that followed. (You can find it at thislife.org/Radio_Episode.aspx?sched=1242)
Mr. Blumberg and Mr. Davidson were hardly the only ones asking questions. Nearly 19 months ago, under the headline “Mortgages May Be Messier Than You Think,” my colleague Gretchen Morgenson wrote, “as is often the case, only after fiery markets burn out do we see the risks that buyers ignore and sellers play down.”
As the assumptions that had blown air into the bubble began to dissipate, many mainstream reports became increasingly skeptical in their reporting and blogs like Calculated Risk offered increasingly alarming insights.
After large-scale financial disasters, the press is usually criticized — often justly — for ignoring the problem, but it’s hard to make that case with the subprime mess. If no one saw this coming, they were not looking.
“This has been a very slow-moving train wreck,” said Andrew Leckey, director of the center for business journalism at Arizona State University. “But it came wrapped in the warm feelings of home ownership while the executives behind it used obfuscation and a lack of transparency to lie about how deeply they were in the subprime business.”
As Mr. Davidson and Mr. Blumberg showed, there’s more than one way to get behind the lies. Using an ad they placed on Craigslist — “Were you employed in the subprime mortgage industry?” — the pair proceeded to assemble a remarkably likable rogues gallery of participants up and down the subprime food chain. One was Clarence Nathan, who sounded like a nice guy, but his house was in foreclosure, and he did not have full-time employment. He had no assets to speak of, and yet he received a loan for $450,000.
And then Mr. Blumberg asked Mr. Nathan the stupid question: “Would you have loaned you the money?”
Mr. Nathan answered: “I wouldn’t have loaned me the money. And nobody I know would have loaned me the money. I know guys who are criminals who wouldn’t loan me that, and they break kneecaps.”
The pair suggested that an excess of global capital — a doubling in available capital in just six years to $72 trillion — left a “giant pool of money” in need of returns. Enter mortgage-backed securities. A lot of them.
One of the remarkable things about the report is the absence of evildoers, even though the cumulative effect of their behavior is now threatening to upend our nation. Early in the broadcast, we hear from Mike Francis, an executive director at the residential mortgage trading desk of Morgan Stanley. “From our standpoint it’s like, there’s a guy out there with a lot of money. We’ve got to find a way to be his sole provider of bonds to fill his appetite. And his appetite’s massive.”
The story then turns to another Mike, Mike Garner, a bartender in Nevada turned mortgage bundler. Mr. Garner said that market appetites for anything that resembled a mortgage pushed loan standards down: “No income, no asset. You don’t have to state anything. Just have a credit score and a pulse.” (Mr. Blumberg pointed out that the pulse thing was optional: 23 dead people in Ohio were also approved.)
Mr. Garner’s boss had been in the business for 25 years and knew something was wrong. “It makes me sick to my stomach the kind of loans we do.”
It was not a very common response. Glen Pizzolorusso was an area sales manager at WMC Mortgage in New York and a young ninja in this new world. Just out of college, he had five cars, a penthouse and a vacation house in Connecticut. And a taste for good living.
“We ordered three, four bottles of Cristal at $1,000 per bottle,” he said on the broadcast, recalling a night when he had a table at Marquee, a nightclub in Manhattan. “They bring it out, you know they’re walking through the crowd, they’re holding the bottles over their heads. There’re firecrackers, sparklers. You know, the little cocktail waitresses,” he said. “You know so you order three or four bottles of those and they’re walking through the crowd and everyone’s like: Whoa, who’re the cool guys? We were the cool guys.”
Mr. Pizzolorusso himself soon fell behind on his own mortgage. “We could take joy in his deep-frying in his own greed, except for the fact that we all will end up getting billed for the Cristal.” Mr. Blumberg said: “I admire him very much for talking to us. “He was completely honest about how he behaved.”
Kevin Kelly, a writer and thinker who helped invent Wired and The Whole Earth Catalog, is a huge fan of “The Giant Pool of Money.”
“It was not an abstract,” he said. “These were ordinary people doing ordinary things that accumulated in the wrong sequence and creating a system that failed. Normally, the scale prohibits people from understanding, but it was broken down into parts and sets of behavior that regular people could understand.”
It was clear even last spring that the people who perpetrated this fraud knew at some level what they were doing.
Mr. Davidson said that the idiosyncrasy of the instruments, combined with the overlay of technology, allowed the traders to live in denial. They would sit at terminals and use data — historical data that had been gathered before they started giving out money to people with no ability to pay — and decide that the risks were manageable. All of it was unreal, ineffable, tough to know. Except the way it turned out, as Mr. Davidson notes near the end of the story.
“It’s as if the global pool of money thought it was putting trillions of dollars in a savings account, but really, half of it was going into a furnace. The money is gone, burned up, never to come back.”
That was five months ago, and now that same furnace is about to burn public money. Mr. Davidson and Mr. Blumberg are working on a follow-up report to be broadcast next week on “This American Life,” that looks into the wreckage of a calamity their reporting all but predicted.
Mr. Blumberg said that back when they first started, “there were all these respected economists saying that no, it’s not a bubble, and yes, there would be a correction, but it would be a soft-landing and I think people were too intimidated to question that,” Mr. Blumberg said.
“That’s the story of my life, asking the stupid question,” he said.
Email: carr@nytimes.com
The Media Equation
Daring to Say Loans Made No Sense By DAVID CARR
Sometimes, if you want the real answer, you have to ask a dumb question.
Alex Blumberg, a producer at “This American Life,” a public radio show that specializes in old-fashioned storytelling about local slices of Americana, has never owned a house or had a mortgage, let alone covered the financial industry. Nonetheless, he was fascinated as he watched the subprime mess unfold.
His dumb question? “Why are they lending money to people who can’t afford to pay it back?”
In 2006, Mr. Blumberg began bothering his friend Adam Davidson, an experienced business reporter at National Public Radio, about subprime loans. Mr. Davidson, who had a broad knowledge of global capital markets, patiently walked him through collateralized debt obligations, yield and risk curves, and the growing amount of international capital in need of a home. But Mr. Blumberg still didn’t get it. How could securities based on lending money to bad risks be good business?
“I was embarrassed for him,” Mr. Davidson said. “I understood how money flowed around the world and I was talking to big-picture thinkers.”
Soon, Mr. Blumberg was madly surfing the Web and torturing his wife and friends with arcane talk about loan syndication and credit-default swaps. “It was a very unhealthy obsession,” he says now. “I just couldn’t understand how they could expect to be paid off when everyone I knew was maxed out on their credit cards. And these were very big loans.”
He decided to do the story for “This American Life,” a show that has a reputation for discussing things like summer camp and inner demons.
“I told him, I don’t know how you’re going to do a story about mortgage securitization for ‘This American Life,’ but good luck,” Mr. Davidson said. But by December of last year, both Mr. Davidson and the broader markets were beginning to have their doubts about whether the fallout from subprime lending had actually been contained.
The more they talked, the more Mr. Davidson realized the education was going both ways. They eventually came up with a one-hour collaboration between NPR News and “This American Life” called “The Giant Pool of Money” that was broadcast last May and became a much downloaded primer on all the mayhem that followed. (You can find it at thislife.org/Radio_Episode.aspx?sched=1242)
Mr. Blumberg and Mr. Davidson were hardly the only ones asking questions. Nearly 19 months ago, under the headline “Mortgages May Be Messier Than You Think,” my colleague Gretchen Morgenson wrote, “as is often the case, only after fiery markets burn out do we see the risks that buyers ignore and sellers play down.”
As the assumptions that had blown air into the bubble began to dissipate, many mainstream reports became increasingly skeptical in their reporting and blogs like Calculated Risk offered increasingly alarming insights.
After large-scale financial disasters, the press is usually criticized — often justly — for ignoring the problem, but it’s hard to make that case with the subprime mess. If no one saw this coming, they were not looking.
“This has been a very slow-moving train wreck,” said Andrew Leckey, director of the center for business journalism at Arizona State University. “But it came wrapped in the warm feelings of home ownership while the executives behind it used obfuscation and a lack of transparency to lie about how deeply they were in the subprime business.”
As Mr. Davidson and Mr. Blumberg showed, there’s more than one way to get behind the lies. Using an ad they placed on Craigslist — “Were you employed in the subprime mortgage industry?” — the pair proceeded to assemble a remarkably likable rogues gallery of participants up and down the subprime food chain. One was Clarence Nathan, who sounded like a nice guy, but his house was in foreclosure, and he did not have full-time employment. He had no assets to speak of, and yet he received a loan for $450,000.
And then Mr. Blumberg asked Mr. Nathan the stupid question: “Would you have loaned you the money?”
Mr. Nathan answered: “I wouldn’t have loaned me the money. And nobody I know would have loaned me the money. I know guys who are criminals who wouldn’t loan me that, and they break kneecaps.”
The pair suggested that an excess of global capital — a doubling in available capital in just six years to $72 trillion — left a “giant pool of money” in need of returns. Enter mortgage-backed securities. A lot of them.
One of the remarkable things about the report is the absence of evildoers, even though the cumulative effect of their behavior is now threatening to upend our nation. Early in the broadcast, we hear from Mike Francis, an executive director at the residential mortgage trading desk of Morgan Stanley. “From our standpoint it’s like, there’s a guy out there with a lot of money. We’ve got to find a way to be his sole provider of bonds to fill his appetite. And his appetite’s massive.”
The story then turns to another Mike, Mike Garner, a bartender in Nevada turned mortgage bundler. Mr. Garner said that market appetites for anything that resembled a mortgage pushed loan standards down: “No income, no asset. You don’t have to state anything. Just have a credit score and a pulse.” (Mr. Blumberg pointed out that the pulse thing was optional: 23 dead people in Ohio were also approved.)
Mr. Garner’s boss had been in the business for 25 years and knew something was wrong. “It makes me sick to my stomach the kind of loans we do.”
It was not a very common response. Glen Pizzolorusso was an area sales manager at WMC Mortgage in New York and a young ninja in this new world. Just out of college, he had five cars, a penthouse and a vacation house in Connecticut. And a taste for good living.
“We ordered three, four bottles of Cristal at $1,000 per bottle,” he said on the broadcast, recalling a night when he had a table at Marquee, a nightclub in Manhattan. “They bring it out, you know they’re walking through the crowd, they’re holding the bottles over their heads. There’re firecrackers, sparklers. You know, the little cocktail waitresses,” he said. “You know so you order three or four bottles of those and they’re walking through the crowd and everyone’s like: Whoa, who’re the cool guys? We were the cool guys.”
Mr. Pizzolorusso himself soon fell behind on his own mortgage. “We could take joy in his deep-frying in his own greed, except for the fact that we all will end up getting billed for the Cristal.” Mr. Blumberg said: “I admire him very much for talking to us. “He was completely honest about how he behaved.”
Kevin Kelly, a writer and thinker who helped invent Wired and The Whole Earth Catalog, is a huge fan of “The Giant Pool of Money.”
“It was not an abstract,” he said. “These were ordinary people doing ordinary things that accumulated in the wrong sequence and creating a system that failed. Normally, the scale prohibits people from understanding, but it was broken down into parts and sets of behavior that regular people could understand.”
It was clear even last spring that the people who perpetrated this fraud knew at some level what they were doing.
Mr. Davidson said that the idiosyncrasy of the instruments, combined with the overlay of technology, allowed the traders to live in denial. They would sit at terminals and use data — historical data that had been gathered before they started giving out money to people with no ability to pay — and decide that the risks were manageable. All of it was unreal, ineffable, tough to know. Except the way it turned out, as Mr. Davidson notes near the end of the story.
“It’s as if the global pool of money thought it was putting trillions of dollars in a savings account, but really, half of it was going into a furnace. The money is gone, burned up, never to come back.”
That was five months ago, and now that same furnace is about to burn public money. Mr. Davidson and Mr. Blumberg are working on a follow-up report to be broadcast next week on “This American Life,” that looks into the wreckage of a calamity their reporting all but predicted.
Mr. Blumberg said that back when they first started, “there were all these respected economists saying that no, it’s not a bubble, and yes, there would be a correction, but it would be a soft-landing and I think people were too intimidated to question that,” Mr. Blumberg said.
“That’s the story of my life, asking the stupid question,” he said.
Email: carr@nytimes.com
Wednesday, October 01, 2008
Lesson From a Crisis: When Trust Vanishes, Worry By DAVID LEONHARDT
October 1, 2008
Economic Scene
Lesson From a Crisis: When Trust Vanishes, Worry By DAVID LEONHARDT
In 1929, Meyer Mishkin owned a shop in New York that sold silk shirts to workingmen. When the stock market crashed that October, he turned to his son, then a student at City College, and offered a version of this sentiment: It serves those rich scoundrels right.
A year later, as Wall Street’s problems were starting to spill into the broader economy, Mr. Mishkin’s store went out of business. He no longer had enough customers. His son had to go to work to support the family, and Mr. Mishkin never held a steady job again.
Frederic Mishkin — Meyer’s grandson and, until he stepped down a month ago, an ally of Ben Bernanke’s on the Federal Reserve Board — told me this story the other day, and its moral is obvious enough. Many people in Washington fear that the country is starting to spiral into a terrible downturn. And to their horror, they see the public, and many members of Congress, turning into modern-day Meyer Mishkins, more interested in punishing Wall Street than saving the economy.
All of which may be true. But there is good reason for the public’s skepticism. The experts and policy makers who so desperately want to take action have failed to tell a compelling story about why they’re so afraid.
It’s not enough to say that markets could freeze up, loans could become impossible to get and the economy could slide into its worst downturn since the Great Depression. For now, the crisis has had little effect on most Americans, beyond their 401(k) statements. So to them, the specter of a depression can sound alarmist, and the $700 billion bill that Congress voted down this week can seem like a bailout for rich scoundrels.
Mr. Bernanke and his fellow worriers need to connect the dots. They need to use their bully pulpits to teach a little lesson on the economics of a credit crisis — how A can lead to B, B to C and C to Depression.
Let’s give it a shot, then.
•
Why are we talking about the Depression, anyway?
Almost no economist thinks that even a terrible downturn would look like the Depression. The government has already responded more aggressively than it did in Herbert Hoover’s day. So a Depression-like contraction — a 30 percent drop in economic activity — is highly unlikely. The country is also far richer today, which means that a much smaller portion of the population is living on the edge of despair. No matter what happens, you’re not likely to see shantytowns.
But the Depression is still relevant, because the basic mechanics of how the economy might fall into a severe recession look quite similar to those that caused the Depression. In both cases, a credit crisis is at the center of the story.
At the start of the 1930s, despite everything that had happened on Wall Street, the American economy had not yet collapsed. Consumer spending and business investment were down, but not horribly so.
In late 1930, however, a rolling series of bank panics began. Investments made by the banks were going bad — or, in some cases, were rumored to be going bad — and nervous customers besieged bank branches to demand their money back. Hundreds of banks eventually closed.
Once a bank in a given town shut its doors, all the knowledge accumulated by the bank officers there effectively disappeared. Other banks weren’t nearly as willing to lend money to local businesses and residents because the loan officers at those banks didn’t know which borrowers were less reliable than they looked. Credit dried up.
“If a guy has a good investment opportunity and he can’t get the funding, he won’t do it,” Mr. Mishkin, who’s now an economics professor at Columbia, notes. “And that’s when the economy collapses.” Or, as Adam Posen, another economist, puts it, “That’s when the Depression became the Great Depression.” By 1932, consumption and investment had both collapsed, and stocks had fallen more than 80 percent from their peak.
As a young academic economist in the 1980s, Mr. Bernanke largely developed the theory that the loan officers’ lost knowledge was a crucial cause of the Depression. He referred to this lost knowledge as “informational capital.” In plain English, it means that trust vanished from the banking sector.
The same thing is happening now. Financial markets are global, not local, today, so the problem isn’t that the failure of any single bank locks individuals or businesses out of the credit markets. Instead, the nasty surprises of the last 13 months — the sort of turmoil that once would have been unthinkable — have caused an effective breakdown in informational capital. Bankers now look at longtime customers and think of that old refrain from a failed marriage: I feel like I don’t even know you.
Bear Stearns, for example, was supposed to have solid, tangible collateral standing behind some of its debts, so that certain lenders would be paid off no matter what. It didn’t, and they weren’t.
The current, more serious stage of the crisis began two weeks ago today, after the collapse of Lehman Brothers and the Fed’s takeover of the American International Group. Those events created a new level of fear. Banks cut back on making loans and instead poured money into Treasury bills, which paid almost no interest but also came with almost no risk. On the loans they did make, banks demanded higher interest rates. Over the past two weeks, rates have generally continued to rise — and these rates, not the stock market, are really what you should be watching.
The current fears can certainly seem irrational. Most households and businesses are still in fine shape, after all. So why aren’t some banks stepping into the void and taking advantage of the newly high interest rates to earn some profit?
There are two chief reasons. One is fairly basic: bankers are nervous that borrowers who look solid today may not turn out to be so solid. Think back to 1930, when the American economy seemed to be weathering the storm.
The second reason is a bit more complex. Banks own a lot of long-term assets (like your mortgage) and hold a lot of short-term debt (which is cheaper than long-term debt). To pay off this debt, they need to take out short-term loans.
In the current environment, bankers are nervous that other banks might shut them out, out of fear, and stop extending that short-term credit. This, in a nutshell, brought about Monday’s collapse of Wachovia and Glitnir Bank in Iceland. To avoid their fate, other banks are hoarding capital, instead of making seemingly profitable loans. And when capital is hoarded, further bank failures become all the more likely.
The crucial point is that a modern economy can’t function when people can’t easily get credit. It takes a while for this to become obvious, since most companies and households don’t take out big new loans every day. But it will eventually become obvious, and painfully so. Already, a lack of car loans has caused vehicle sales to fall further.
Could the current crisis lift — could banks decide they really are missing out on profitable investing opportunities — without a $700 billion government fund to relieve Wall Street of its scariest holdings? Sure. And is Congress right to fight for a workable program that’s as inexpensive and as tough on Wall Street as possible? Absolutely.
But in the end, this really isn’t about Wall Street. It’s about reducing the risk that something really bad happens. It’s about limiting the damage from the past decade’s financial excesses. Unfortunately, there is no way to accomplish that without also extending a helping hand to Wall Street. That is where our credit markets are, and we need them to start working again.
“We are facing a major national crisis,” as Meyer Mishkin’s grandson says. “To do nothing right now is to do what was done during the Great Depression.”
E-mail: leonhardt@nytimes.com.
Economic Scene
Lesson From a Crisis: When Trust Vanishes, Worry By DAVID LEONHARDT
In 1929, Meyer Mishkin owned a shop in New York that sold silk shirts to workingmen. When the stock market crashed that October, he turned to his son, then a student at City College, and offered a version of this sentiment: It serves those rich scoundrels right.
A year later, as Wall Street’s problems were starting to spill into the broader economy, Mr. Mishkin’s store went out of business. He no longer had enough customers. His son had to go to work to support the family, and Mr. Mishkin never held a steady job again.
Frederic Mishkin — Meyer’s grandson and, until he stepped down a month ago, an ally of Ben Bernanke’s on the Federal Reserve Board — told me this story the other day, and its moral is obvious enough. Many people in Washington fear that the country is starting to spiral into a terrible downturn. And to their horror, they see the public, and many members of Congress, turning into modern-day Meyer Mishkins, more interested in punishing Wall Street than saving the economy.
All of which may be true. But there is good reason for the public’s skepticism. The experts and policy makers who so desperately want to take action have failed to tell a compelling story about why they’re so afraid.
It’s not enough to say that markets could freeze up, loans could become impossible to get and the economy could slide into its worst downturn since the Great Depression. For now, the crisis has had little effect on most Americans, beyond their 401(k) statements. So to them, the specter of a depression can sound alarmist, and the $700 billion bill that Congress voted down this week can seem like a bailout for rich scoundrels.
Mr. Bernanke and his fellow worriers need to connect the dots. They need to use their bully pulpits to teach a little lesson on the economics of a credit crisis — how A can lead to B, B to C and C to Depression.
Let’s give it a shot, then.
•
Why are we talking about the Depression, anyway?
Almost no economist thinks that even a terrible downturn would look like the Depression. The government has already responded more aggressively than it did in Herbert Hoover’s day. So a Depression-like contraction — a 30 percent drop in economic activity — is highly unlikely. The country is also far richer today, which means that a much smaller portion of the population is living on the edge of despair. No matter what happens, you’re not likely to see shantytowns.
But the Depression is still relevant, because the basic mechanics of how the economy might fall into a severe recession look quite similar to those that caused the Depression. In both cases, a credit crisis is at the center of the story.
At the start of the 1930s, despite everything that had happened on Wall Street, the American economy had not yet collapsed. Consumer spending and business investment were down, but not horribly so.
In late 1930, however, a rolling series of bank panics began. Investments made by the banks were going bad — or, in some cases, were rumored to be going bad — and nervous customers besieged bank branches to demand their money back. Hundreds of banks eventually closed.
Once a bank in a given town shut its doors, all the knowledge accumulated by the bank officers there effectively disappeared. Other banks weren’t nearly as willing to lend money to local businesses and residents because the loan officers at those banks didn’t know which borrowers were less reliable than they looked. Credit dried up.
“If a guy has a good investment opportunity and he can’t get the funding, he won’t do it,” Mr. Mishkin, who’s now an economics professor at Columbia, notes. “And that’s when the economy collapses.” Or, as Adam Posen, another economist, puts it, “That’s when the Depression became the Great Depression.” By 1932, consumption and investment had both collapsed, and stocks had fallen more than 80 percent from their peak.
As a young academic economist in the 1980s, Mr. Bernanke largely developed the theory that the loan officers’ lost knowledge was a crucial cause of the Depression. He referred to this lost knowledge as “informational capital.” In plain English, it means that trust vanished from the banking sector.
The same thing is happening now. Financial markets are global, not local, today, so the problem isn’t that the failure of any single bank locks individuals or businesses out of the credit markets. Instead, the nasty surprises of the last 13 months — the sort of turmoil that once would have been unthinkable — have caused an effective breakdown in informational capital. Bankers now look at longtime customers and think of that old refrain from a failed marriage: I feel like I don’t even know you.
Bear Stearns, for example, was supposed to have solid, tangible collateral standing behind some of its debts, so that certain lenders would be paid off no matter what. It didn’t, and they weren’t.
The current, more serious stage of the crisis began two weeks ago today, after the collapse of Lehman Brothers and the Fed’s takeover of the American International Group. Those events created a new level of fear. Banks cut back on making loans and instead poured money into Treasury bills, which paid almost no interest but also came with almost no risk. On the loans they did make, banks demanded higher interest rates. Over the past two weeks, rates have generally continued to rise — and these rates, not the stock market, are really what you should be watching.
The current fears can certainly seem irrational. Most households and businesses are still in fine shape, after all. So why aren’t some banks stepping into the void and taking advantage of the newly high interest rates to earn some profit?
There are two chief reasons. One is fairly basic: bankers are nervous that borrowers who look solid today may not turn out to be so solid. Think back to 1930, when the American economy seemed to be weathering the storm.
The second reason is a bit more complex. Banks own a lot of long-term assets (like your mortgage) and hold a lot of short-term debt (which is cheaper than long-term debt). To pay off this debt, they need to take out short-term loans.
In the current environment, bankers are nervous that other banks might shut them out, out of fear, and stop extending that short-term credit. This, in a nutshell, brought about Monday’s collapse of Wachovia and Glitnir Bank in Iceland. To avoid their fate, other banks are hoarding capital, instead of making seemingly profitable loans. And when capital is hoarded, further bank failures become all the more likely.
The crucial point is that a modern economy can’t function when people can’t easily get credit. It takes a while for this to become obvious, since most companies and households don’t take out big new loans every day. But it will eventually become obvious, and painfully so. Already, a lack of car loans has caused vehicle sales to fall further.
Could the current crisis lift — could banks decide they really are missing out on profitable investing opportunities — without a $700 billion government fund to relieve Wall Street of its scariest holdings? Sure. And is Congress right to fight for a workable program that’s as inexpensive and as tough on Wall Street as possible? Absolutely.
But in the end, this really isn’t about Wall Street. It’s about reducing the risk that something really bad happens. It’s about limiting the damage from the past decade’s financial excesses. Unfortunately, there is no way to accomplish that without also extending a helping hand to Wall Street. That is where our credit markets are, and we need them to start working again.
“We are facing a major national crisis,” as Meyer Mishkin’s grandson says. “To do nothing right now is to do what was done during the Great Depression.”
E-mail: leonhardt@nytimes.com.
Monday, September 29, 2008
After the Deal, the Focus Will Shift to Regulation By FLOYD NORRIS
TimesPeople
The New York Times
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September 29, 2008
High & Low Finance
After the Deal, the Focus Will Shift to Regulation By FLOYD NORRIS
Even before Congress passes a $700 billion bank bailout that nearly all legislators believe to be both necessary and unpopular, the jostling has begun over legislation that may prove to be the first test for the next president: How to reshape the financial system and its regulation.
It is clear that the old system failed — it wouldn’t need the bailout otherwise — but the diagnosis of why that happened may be crucial in deciding what changes are needed.
Already, liberals are blaming the deregulation that began under Ronald Reagan for letting a financial system get out of control, and conservatives are pointing to market interventions by liberals — notably efforts to assure mortgage loans for the poor and minorities — as being the root cause of the mess.
Conservatives are also pointing to accounting rules, which forced banks to write down the value of their loans, and to excesses by Fannie Mae and Freddie Mac, the government-sponsored mortgage enterprises that have since been nationalized, whose troubles they have tried to tie to Democrats.
Both sides roundly denounce Wall Street greed, but there is no clear legislative solution to that, so such rhetoric is more likely to shape the campaign than the postelection legislative battle.
When the liberals talk about deregulation, they most often point to the Gramm-Leach-Bliley Act of 1999, which tore down the last remaining walls between commercial banks and investment banks.
But there is little evidence to tie much of the problem to that law. Most of the walls, erected during the Depression, had already been breached over many years, with the approval of regulators. Besides, the first major failures of this crisis, Bear Stearns and Lehman Brothers, were investment banks that did not go into commercial banking in a big way.
Instead, it might be more appropriate to describe the problem as “unregulation.” That regulation was scaled back was less of a factor than Wall Street’s finding ways around regulation by establishing new products that could work between the cracks. Those new products grew to dominate the financial system, and they turned out to be prone to collapse.
Both parties bear responsibility for that, because there was little controversy over it when it was happening. Alan Greenspan, then the chairman of the Federal Reserve, believed that the new products could distribute risk to investors, who were better able to bear it than was the banking system he was charged with regulating, and few legislators were willing to challenge Mr. Greenspan on what appeared to be an arcane issue.
But the family that can take the most credit for that is the Gramms, Phil and Wendy. It was Wendy Gramm, as chairwoman of the Commodity Futures Trading Commission in the early 1990s, who championed keeping her agency out of derivative trading. It was Phil Gramm, as the chairman of the Senate Banking Committee, who pushed through legislation in 2000 to assure that no future C.F.T.C., let alone any other regulator, would have jurisdiction over such products.
At the same time that the credit-default swap market was growing, so were hedge funds, which became behemoths that were largely exempt from any regulation.
The logic behind both of those decisions was that regulation was about protecting individual investors. Because small investors could not invest in hedge funds or mortgage-backed securities or credit-default swaps, the government had no reason to interfere with private enterprise.
It turns out that those products could threaten the entire financial system, and their abuse could produce a credit crisis affecting virtually everyone.
One obvious answer is that the new regulation system should not have so many loopholes. It is possible that the old markets and old products do have too much regulation, and that deregulation in some areas would be appropriate. But the guiding principle should be that similar products and similar institutions deserve similar regulation. If large institutional investors are required to disclose their positions every quarter, why should large hedge funds be treated differently?
That principle will need to be applied internationally as well, which will require diplomacy and a willingness to consider views of governments that are much less sympathetic to financial innovation.
The growth of the new financial system also tends to undermine the conservative argument that much of the problem can be traced to the Community Reinvestment Act, which was passed by Congress in 1977. It has been cited by some bankers as a reason they made what turned out to be bad loans, but most of the worst loans appear to have been made outside of the banking system, by mortgage brokers not subject to its rules.
Similarly, Fannie Mae and Freddie Mac undoubtedly bought many loans that should not have been made. But the worst loans were privately syndicated and snapped up by investors.
The accounting rule requiring banks to mark their assets to their market value has been widely blamed for producing losses that alarmed investors. Newt Gingrich, the former House speaker, said Sunday on the ABC program “This Week” that “between half to 70 percent of the problem” was caused by the rule, and some Republican legislators pushed to have the bailout bill suspend the rule.
But if one wants to look at accounting rules as a cause, it would be more productive to examine the rules that permitted the crisis to grow without being noticed, not at the rule that finally brought the truth to public attention.
When the Financial Accounting Standards Board met after the Enron scandal to tighten the rules over off-balance-sheet entities, it permitted banks to continue keeping many assets off their balance sheets, under rules that now — belatedly — are being changed. Out of sight should not have meant out of mind, as many of the off-balance-sheet items have produced major losses.
Similarly, the rules permitted banks to turn groups of mortgages into securities and report profits even though they retained some of the risk that the mortgages would go bad. By underestimating that risk, the banks reported higher profits than they should have, and the executives qualified for larger bonuses. Many of the recent losses are just reversing profits that, in reality, were never earned.
In any case, it is too late to abandon mark-to-market accounting. Just how reassuring to investors would it be for the government to issue a rule saying it is O.K. for banks to value assets for far more than anyone would pay for them?
Perhaps the most important cause of this disaster is one that probably does not need legislation: belief in so-called rocket scientists and their computer models, which used the past to forecast the future, and did so with complete, and completely unjustified, assurance.
It was that faith that led rating agencies to give top-grade classification to securities that were in fact very risky and led investors to buy them. It was that faith that led regulators to defer to the banks’ own risk models in determining how much capital they needed. It was that faith that led senior managements of Wall Street firms — many of whom had only a general understanding of what their traders were doing — to assume that risk was under control when it was not.
That faith is gone now. It will not come back soon.
The legislation next year will shape the efforts of the American financial system to right itself, and to provide credit to families and businesses without taking undue risks that can again threaten to destroy the system. The details of those decisions will be far more important than the details of the bailout that is about to be approved.
The New York Times
Printer Friendly Format Sponsored By
September 29, 2008
High & Low Finance
After the Deal, the Focus Will Shift to Regulation By FLOYD NORRIS
Even before Congress passes a $700 billion bank bailout that nearly all legislators believe to be both necessary and unpopular, the jostling has begun over legislation that may prove to be the first test for the next president: How to reshape the financial system and its regulation.
It is clear that the old system failed — it wouldn’t need the bailout otherwise — but the diagnosis of why that happened may be crucial in deciding what changes are needed.
Already, liberals are blaming the deregulation that began under Ronald Reagan for letting a financial system get out of control, and conservatives are pointing to market interventions by liberals — notably efforts to assure mortgage loans for the poor and minorities — as being the root cause of the mess.
Conservatives are also pointing to accounting rules, which forced banks to write down the value of their loans, and to excesses by Fannie Mae and Freddie Mac, the government-sponsored mortgage enterprises that have since been nationalized, whose troubles they have tried to tie to Democrats.
Both sides roundly denounce Wall Street greed, but there is no clear legislative solution to that, so such rhetoric is more likely to shape the campaign than the postelection legislative battle.
When the liberals talk about deregulation, they most often point to the Gramm-Leach-Bliley Act of 1999, which tore down the last remaining walls between commercial banks and investment banks.
But there is little evidence to tie much of the problem to that law. Most of the walls, erected during the Depression, had already been breached over many years, with the approval of regulators. Besides, the first major failures of this crisis, Bear Stearns and Lehman Brothers, were investment banks that did not go into commercial banking in a big way.
Instead, it might be more appropriate to describe the problem as “unregulation.” That regulation was scaled back was less of a factor than Wall Street’s finding ways around regulation by establishing new products that could work between the cracks. Those new products grew to dominate the financial system, and they turned out to be prone to collapse.
Both parties bear responsibility for that, because there was little controversy over it when it was happening. Alan Greenspan, then the chairman of the Federal Reserve, believed that the new products could distribute risk to investors, who were better able to bear it than was the banking system he was charged with regulating, and few legislators were willing to challenge Mr. Greenspan on what appeared to be an arcane issue.
But the family that can take the most credit for that is the Gramms, Phil and Wendy. It was Wendy Gramm, as chairwoman of the Commodity Futures Trading Commission in the early 1990s, who championed keeping her agency out of derivative trading. It was Phil Gramm, as the chairman of the Senate Banking Committee, who pushed through legislation in 2000 to assure that no future C.F.T.C., let alone any other regulator, would have jurisdiction over such products.
At the same time that the credit-default swap market was growing, so were hedge funds, which became behemoths that were largely exempt from any regulation.
The logic behind both of those decisions was that regulation was about protecting individual investors. Because small investors could not invest in hedge funds or mortgage-backed securities or credit-default swaps, the government had no reason to interfere with private enterprise.
It turns out that those products could threaten the entire financial system, and their abuse could produce a credit crisis affecting virtually everyone.
One obvious answer is that the new regulation system should not have so many loopholes. It is possible that the old markets and old products do have too much regulation, and that deregulation in some areas would be appropriate. But the guiding principle should be that similar products and similar institutions deserve similar regulation. If large institutional investors are required to disclose their positions every quarter, why should large hedge funds be treated differently?
That principle will need to be applied internationally as well, which will require diplomacy and a willingness to consider views of governments that are much less sympathetic to financial innovation.
The growth of the new financial system also tends to undermine the conservative argument that much of the problem can be traced to the Community Reinvestment Act, which was passed by Congress in 1977. It has been cited by some bankers as a reason they made what turned out to be bad loans, but most of the worst loans appear to have been made outside of the banking system, by mortgage brokers not subject to its rules.
Similarly, Fannie Mae and Freddie Mac undoubtedly bought many loans that should not have been made. But the worst loans were privately syndicated and snapped up by investors.
The accounting rule requiring banks to mark their assets to their market value has been widely blamed for producing losses that alarmed investors. Newt Gingrich, the former House speaker, said Sunday on the ABC program “This Week” that “between half to 70 percent of the problem” was caused by the rule, and some Republican legislators pushed to have the bailout bill suspend the rule.
But if one wants to look at accounting rules as a cause, it would be more productive to examine the rules that permitted the crisis to grow without being noticed, not at the rule that finally brought the truth to public attention.
When the Financial Accounting Standards Board met after the Enron scandal to tighten the rules over off-balance-sheet entities, it permitted banks to continue keeping many assets off their balance sheets, under rules that now — belatedly — are being changed. Out of sight should not have meant out of mind, as many of the off-balance-sheet items have produced major losses.
Similarly, the rules permitted banks to turn groups of mortgages into securities and report profits even though they retained some of the risk that the mortgages would go bad. By underestimating that risk, the banks reported higher profits than they should have, and the executives qualified for larger bonuses. Many of the recent losses are just reversing profits that, in reality, were never earned.
In any case, it is too late to abandon mark-to-market accounting. Just how reassuring to investors would it be for the government to issue a rule saying it is O.K. for banks to value assets for far more than anyone would pay for them?
Perhaps the most important cause of this disaster is one that probably does not need legislation: belief in so-called rocket scientists and their computer models, which used the past to forecast the future, and did so with complete, and completely unjustified, assurance.
It was that faith that led rating agencies to give top-grade classification to securities that were in fact very risky and led investors to buy them. It was that faith that led regulators to defer to the banks’ own risk models in determining how much capital they needed. It was that faith that led senior managements of Wall Street firms — many of whom had only a general understanding of what their traders were doing — to assume that risk was under control when it was not.
That faith is gone now. It will not come back soon.
The legislation next year will shape the efforts of the American financial system to right itself, and to provide credit to families and businesses without taking undue risks that can again threaten to destroy the system. The details of those decisions will be far more important than the details of the bailout that is about to be approved.
Sunday, September 28, 2008
David Leonhardt: Bubblenomics
David Leonhardt: Bubblenomics
07:29 AM CDT on Sunday, September 28, 2008
The past two weeks, by any standard, have been extraordinary for the U.S. economy and its financial system. Merrill Lynch, which was founded during Woodrow Wilson's administration, agreed to be bought for a bargain-basement price, while Lehman Brothers, which dates to John Tyler's presidency, simply collapsed.
By the end of last week, the federal government agreed to buy hundreds of billions of dollars in securities that no bank wanted. It appears to be the government's biggest fiscal intervention since the Great Depression, designed to get the financial markets working again and keep a credit freeze from sending the economy into a deep recession. But even if the economy avoids a tailspin, the next couple of years aren't likely to feel especially good. It's been a long period of excess, and the hangover could be long, as well.
Also Online
Rod Dreher: And it was written, our blame
Steve Bartlett: Former mayor on Wall Street mess
For the near future, the most likely outcome remains slow economic growth, scant income gains for most workers and, for investors, disappointing returns from stocks and real estate. If consumers begin to cut back on their debt-fueled spending, things could get worse.
Yet, historic though this tumult has been, there is something familiar about what is happening. Once again, we are seeing the puncturing of a speculative bubble that was the result of asset prices soaring high above the underlying value of the assets. For as long as markets have existed, bubbles have formed. And whenever one of those bubbles begins to leak, it typically needs years to deflate, causing enormous economic damage as it does.
Only now, for instance, are the bubbles of the past decade and a half, first in the stock market and then in real estate, starting to go away. It's easy to think of the turmoil of the past 13 months as being unconnected to the stock bubble of the 1990s, which appeared to end with the dot-com crash of 2000 and 2001. That crash brought down the overall stock market by more than a third, its worst drop since the 1970s oil crisis. Corporate spending on new equipment then plunged and employment fell for three straight years.
But dramatic though it was, the dot-com crash did not actually come close to erasing the excesses of the 1990s. Indeed, by some of the most meaningful measures, Wall Street after the crash looked a lot more like it was in a bubble than a bust.
As late as 2004, financial services firms earned 28.3 percent of corporate America's total profits, according to Moody's Economy.com. That was somewhat lower than it had been over the previous few years, but still almost double the financial sector's average share of profits throughout the 1970s and '80s. By 2007, the share had fallen only marginally, to 27.4 percent.
Meanwhile, the share of wages and salaries earned by employees of financial services firms continued to climb and reached a peak last year. Of every dollar paid to the U.S. workforce in 2008, almost 10 cents went to people working at investment banks and other finance companies, up from about 6 or 7 cents throughout the 1970s and '80s.
How did this happen? For one thing, the population of the United States (and most of the industrialized world) was aging and had built up savings. This created greater need for financial services. In addition, the economic rise of Asia – and, in recent years, the increase in oil prices – gave overseas governments more money to invest. Many turned to Wall Street.
Nonetheless, a significant portion of the finance boom also seems to have been unrelated to economic performance and thus unsustainable. Benjamin M. Friedman, author of The Moral Consequences of Economic Growth, recalled that when he worked at Morgan Stanley in the early 1970s, the firm's annual reports were filled with photographs of factories and other tangible businesses. More recently, Wall Street's annual reports tend to highlight not the businesses that firms were advising so much as finance for the sake of finance, showing upward-sloping graphs and photographs of traders.
"I have the sense that in many of these firms," Dr. Friedman said, "the activity has become further and further divorced from actual economic activity."
Which might serve as a summary of how the current crisis came to pass. Wall Street traders began to believe that the values they had assigned to all sorts of assets were rational because, well, they had assigned them.
Traders sliced mortgages into so many little pieces that they forgot what they were really trading: contracts based on increasingly shaky loans. As the crisis has spread, other loans have started going bad as well. Hyun Song Shin, an economist at Princeton, estimates that banks have thus far absorbed only about one-third to one-half of the losses they will eventually be forced to take.
One of the few pieces of good news is that Wall Street finally seems to be coming to grips with the depth of its problems. You can see that most clearly, perhaps, in stock prices, which have at long last fallen from the stratospheric levels of the past decade.
The classic measure of whether the stock market is overvalued is the price-earnings ratio, which divides stock prices by annual corporate earnings. At the height of the bubble, in 2000, companies in the Standard & Poor's 500 Index were trading at 36 times their average earnings over the previous five years. It was the highest valuation since at least the 1880s, according to the economist Robert Shiller.
By 2004, surprisingly enough, the ratio had dropped only to about 26, still higher than at any point since the 1930s. At the start of last year, it was still 26.
The ratio has dropped closer to its post-World War II average of 17 in the last couple of weeks. At least by this one measure, stocks are no longer blatantly overvalued.
This doesn't necessarily mean they are done falling. For one thing, corporate profits could decline, particularly if households begin pulling back on spending. The unusually rapid rise of consumer spending over the past two decades is arguably the third bubble confronting the economy. It has happened thanks in part to a huge increase in debt, which may now be coming to an end, just as Wall Street's love affair with debt appears to be ending as well.
And even if the economy does better than expected, investors may still turn pessimistic. "We tend to go through pendulum swings," said Joel Seligman, the president of the University of Rochester, a longtime Wall Street observer. There are long periods of over-exuberance, in which investors worry that they are missing the next great thing, followed by crises that make those same investors fear that the world as they know it is coming to an end.
That seemed to be the case a week and a half ago, when share prices of Goldman Sachs and Morgan Stanley plunged even though the firms were still making money. Glenn Schorr, a UBS analyst, wrote an e-mail to clients saying, "Stop the Insanity."
But bubbles inevitably produce insanity, both on the way up and the way down. The formerly laissez-faire Bush administration, along with the Federal Reserve, now says the only way to restore sanity to the markets is for the government to buy an enormous pile of mortgage-related securities. Theoretically, the government could turn a profit on the securities if they can be sold for higher prices when normal conditions return.
But few expect that outcome. Sen. Richard Shelby of Alabama, the ranking Republican on the Senate Banking Committee, estimated that the ultimate cost to taxpayers could be in the range of $1 trillion, or about 2 ½ times as large as this year's federal budget deficit.
A guiding principle of economic policy in recent years has been that nobody is smart enough to diagnose a bubble until it has already deflated. This was one of Alan Greenspan's mantras during his tenure as the chairman of the Fed. His successor, Ben Bernanke, said much the same thing when he took office in 2006. As they saw it, no matter how high stock prices rose relative to profits, or no matter how high house prices rose relative to rents, regulators deferred to the collective wisdom of the market.
The market is usually right, after all. Even when it isn't, Mr. Greenspan maintained, pricking a bubble before it grew too large could stifle innovation and hurt other parts of the economy. Cleaning up the aftermath of a bubble is easier and less expensive, he argued. We're living through that cleanup now.
David Leonhardt writes about economics for The New York Times. His e-mail address is leonhardt@nytimes.com.
07:29 AM CDT on Sunday, September 28, 2008
The past two weeks, by any standard, have been extraordinary for the U.S. economy and its financial system. Merrill Lynch, which was founded during Woodrow Wilson's administration, agreed to be bought for a bargain-basement price, while Lehman Brothers, which dates to John Tyler's presidency, simply collapsed.
By the end of last week, the federal government agreed to buy hundreds of billions of dollars in securities that no bank wanted. It appears to be the government's biggest fiscal intervention since the Great Depression, designed to get the financial markets working again and keep a credit freeze from sending the economy into a deep recession. But even if the economy avoids a tailspin, the next couple of years aren't likely to feel especially good. It's been a long period of excess, and the hangover could be long, as well.
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For the near future, the most likely outcome remains slow economic growth, scant income gains for most workers and, for investors, disappointing returns from stocks and real estate. If consumers begin to cut back on their debt-fueled spending, things could get worse.
Yet, historic though this tumult has been, there is something familiar about what is happening. Once again, we are seeing the puncturing of a speculative bubble that was the result of asset prices soaring high above the underlying value of the assets. For as long as markets have existed, bubbles have formed. And whenever one of those bubbles begins to leak, it typically needs years to deflate, causing enormous economic damage as it does.
Only now, for instance, are the bubbles of the past decade and a half, first in the stock market and then in real estate, starting to go away. It's easy to think of the turmoil of the past 13 months as being unconnected to the stock bubble of the 1990s, which appeared to end with the dot-com crash of 2000 and 2001. That crash brought down the overall stock market by more than a third, its worst drop since the 1970s oil crisis. Corporate spending on new equipment then plunged and employment fell for three straight years.
But dramatic though it was, the dot-com crash did not actually come close to erasing the excesses of the 1990s. Indeed, by some of the most meaningful measures, Wall Street after the crash looked a lot more like it was in a bubble than a bust.
As late as 2004, financial services firms earned 28.3 percent of corporate America's total profits, according to Moody's Economy.com. That was somewhat lower than it had been over the previous few years, but still almost double the financial sector's average share of profits throughout the 1970s and '80s. By 2007, the share had fallen only marginally, to 27.4 percent.
Meanwhile, the share of wages and salaries earned by employees of financial services firms continued to climb and reached a peak last year. Of every dollar paid to the U.S. workforce in 2008, almost 10 cents went to people working at investment banks and other finance companies, up from about 6 or 7 cents throughout the 1970s and '80s.
How did this happen? For one thing, the population of the United States (and most of the industrialized world) was aging and had built up savings. This created greater need for financial services. In addition, the economic rise of Asia – and, in recent years, the increase in oil prices – gave overseas governments more money to invest. Many turned to Wall Street.
Nonetheless, a significant portion of the finance boom also seems to have been unrelated to economic performance and thus unsustainable. Benjamin M. Friedman, author of The Moral Consequences of Economic Growth, recalled that when he worked at Morgan Stanley in the early 1970s, the firm's annual reports were filled with photographs of factories and other tangible businesses. More recently, Wall Street's annual reports tend to highlight not the businesses that firms were advising so much as finance for the sake of finance, showing upward-sloping graphs and photographs of traders.
"I have the sense that in many of these firms," Dr. Friedman said, "the activity has become further and further divorced from actual economic activity."
Which might serve as a summary of how the current crisis came to pass. Wall Street traders began to believe that the values they had assigned to all sorts of assets were rational because, well, they had assigned them.
Traders sliced mortgages into so many little pieces that they forgot what they were really trading: contracts based on increasingly shaky loans. As the crisis has spread, other loans have started going bad as well. Hyun Song Shin, an economist at Princeton, estimates that banks have thus far absorbed only about one-third to one-half of the losses they will eventually be forced to take.
One of the few pieces of good news is that Wall Street finally seems to be coming to grips with the depth of its problems. You can see that most clearly, perhaps, in stock prices, which have at long last fallen from the stratospheric levels of the past decade.
The classic measure of whether the stock market is overvalued is the price-earnings ratio, which divides stock prices by annual corporate earnings. At the height of the bubble, in 2000, companies in the Standard & Poor's 500 Index were trading at 36 times their average earnings over the previous five years. It was the highest valuation since at least the 1880s, according to the economist Robert Shiller.
By 2004, surprisingly enough, the ratio had dropped only to about 26, still higher than at any point since the 1930s. At the start of last year, it was still 26.
The ratio has dropped closer to its post-World War II average of 17 in the last couple of weeks. At least by this one measure, stocks are no longer blatantly overvalued.
This doesn't necessarily mean they are done falling. For one thing, corporate profits could decline, particularly if households begin pulling back on spending. The unusually rapid rise of consumer spending over the past two decades is arguably the third bubble confronting the economy. It has happened thanks in part to a huge increase in debt, which may now be coming to an end, just as Wall Street's love affair with debt appears to be ending as well.
And even if the economy does better than expected, investors may still turn pessimistic. "We tend to go through pendulum swings," said Joel Seligman, the president of the University of Rochester, a longtime Wall Street observer. There are long periods of over-exuberance, in which investors worry that they are missing the next great thing, followed by crises that make those same investors fear that the world as they know it is coming to an end.
That seemed to be the case a week and a half ago, when share prices of Goldman Sachs and Morgan Stanley plunged even though the firms were still making money. Glenn Schorr, a UBS analyst, wrote an e-mail to clients saying, "Stop the Insanity."
But bubbles inevitably produce insanity, both on the way up and the way down. The formerly laissez-faire Bush administration, along with the Federal Reserve, now says the only way to restore sanity to the markets is for the government to buy an enormous pile of mortgage-related securities. Theoretically, the government could turn a profit on the securities if they can be sold for higher prices when normal conditions return.
But few expect that outcome. Sen. Richard Shelby of Alabama, the ranking Republican on the Senate Banking Committee, estimated that the ultimate cost to taxpayers could be in the range of $1 trillion, or about 2 ½ times as large as this year's federal budget deficit.
A guiding principle of economic policy in recent years has been that nobody is smart enough to diagnose a bubble until it has already deflated. This was one of Alan Greenspan's mantras during his tenure as the chairman of the Fed. His successor, Ben Bernanke, said much the same thing when he took office in 2006. As they saw it, no matter how high stock prices rose relative to profits, or no matter how high house prices rose relative to rents, regulators deferred to the collective wisdom of the market.
The market is usually right, after all. Even when it isn't, Mr. Greenspan maintained, pricking a bubble before it grew too large could stifle innovation and hurt other parts of the economy. Cleaning up the aftermath of a bubble is easier and less expensive, he argued. We're living through that cleanup now.
David Leonhardt writes about economics for The New York Times. His e-mail address is leonhardt@nytimes.com.
Saturday, September 27, 2008
Out of the Shadows and Into the Harsh Light By FLOYD NORRIS
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The New York Times
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September 27, 2008
Off the Charts
Out of the Shadows and Into the Harsh Light By FLOYD NORRIS
THE credit default swaps market — a market that for years was kept out of view and away from any regulation — has suddenly turned into a political hot potato in Washington.
The chairman of the Securities and Exchange Commission said this week that regulation was needed immediately, while the secretary of the Treasury said efforts were already under way to get things under control, and urged caution.
Such swaps, which enable lenders to a company to purchase what amounts to insurance that will protect them if the company defaults on its debts, have grown exponentially in recent years, with the nominal amount of debt guaranteed rising to more than $62 trillion at the end of last year from $631 billion in mid-2001.
The sudden interest in the market stems from two separate but related developments. The collapse of a major firm in the market could set off a chain of problems, a fact that has scared the Treasury Department this year.
In addition, speculators who think a financial firm will fail can buy credit-default swaps. They will profit if they are right. But even if the firm is not in trouble, an increase in the price of those swaps may scare other investors, and send the company’s stock down. That prospect has alarmed the S.E.C. As the political debate was growing, the International Swaps and Derivatives Association, a trade group, reported that the amount of outstanding credit-default swaps declined in the first half of 2008, something that had never happened before.
The 12 percent decline, to $54.6 trillion, still left the market vastly larger than the total amount of debt that can be insured. The huge total reflects the way the market is structured, as well as the fact that someone does not need to actually be owed money by a company to be able to buy a credit-default swap. In that case, the buyer is betting that the company will go broke.
Within that huge market, many contracts offset one another — assuming that all parties honor their commitments. But if one major firm goes broke, the effect could snowball as others are unable to meet their commitments.
In regulated futures markets, contracts are centrally cleared. If you buy an oil futures contract on Monday, and sell it on Wednesday, you have made your profit (or taken your loss) and you no longer have any stake in whether oil prices rise or fall. But if you buy a credit-default swap on Monday from one firm, and sell an identical swap on Wednesday to another firm, you still face the potential of risk if the party that sold the swap to you is unable to pay when a default occurs, perhaps years later.
“One of the major reasons that the government helped out in the Bear Stearns situation,” Treasury Secretary Henry M. Paulson Jr. testified at a Senate hearing this week, “was to avoid throwing it into bankruptcy with all the credit-default swaps.”
Mr. Paulson said the Federal Reserve Bank of New York was working to develop protocols for that market to deal with a failure of a big player, and indicated that he did not see a need for legislation.
But Christopher Cox, the S.E.C. chairman, said Congress should act. “Neither the S.E.C. nor any regulator has authority over the C.D.S. market, even to require minimum disclosure to the market,” he testified. “The market is ripe for fraud and manipulation,” he added.
The S.E.C. is investigating possible fraud, although no charges have been brought, and is looking for cases where someone may have purchased credit-default swaps to drive up their price and persuade others that a company was in trouble.
The swaps market has been exempt from regulation since it began to grow, thanks to legislation the industry sought. The industry argued that regulation would drive business overseas, and that no regulation was needed because ordinary investors did not trade in the market.
In announcing the decline in the amount of swaps outstanding, Robert Pickel, the chief executive of the trade group, said it reflected industry efforts “to reduce risk by tearing up economically offsetting transactions, and demonstrates the industry’s ongoing commitment to reduce risk and enhance operational efficiency.”
The accompanying charts show the growth of the amount of credit-default swaps outstanding, and show how those totals compare with the total amount of outstanding loans from banks and others to corporations and foreign governments. Even with the decline, the swaps volume is more than three times the debt total.
Floyd Norris comments on finance and economics in his blog at norris.blogs.nytimes.com.
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September 27, 2008
Off the Charts
Out of the Shadows and Into the Harsh Light By FLOYD NORRIS
THE credit default swaps market — a market that for years was kept out of view and away from any regulation — has suddenly turned into a political hot potato in Washington.
The chairman of the Securities and Exchange Commission said this week that regulation was needed immediately, while the secretary of the Treasury said efforts were already under way to get things under control, and urged caution.
Such swaps, which enable lenders to a company to purchase what amounts to insurance that will protect them if the company defaults on its debts, have grown exponentially in recent years, with the nominal amount of debt guaranteed rising to more than $62 trillion at the end of last year from $631 billion in mid-2001.
The sudden interest in the market stems from two separate but related developments. The collapse of a major firm in the market could set off a chain of problems, a fact that has scared the Treasury Department this year.
In addition, speculators who think a financial firm will fail can buy credit-default swaps. They will profit if they are right. But even if the firm is not in trouble, an increase in the price of those swaps may scare other investors, and send the company’s stock down. That prospect has alarmed the S.E.C. As the political debate was growing, the International Swaps and Derivatives Association, a trade group, reported that the amount of outstanding credit-default swaps declined in the first half of 2008, something that had never happened before.
The 12 percent decline, to $54.6 trillion, still left the market vastly larger than the total amount of debt that can be insured. The huge total reflects the way the market is structured, as well as the fact that someone does not need to actually be owed money by a company to be able to buy a credit-default swap. In that case, the buyer is betting that the company will go broke.
Within that huge market, many contracts offset one another — assuming that all parties honor their commitments. But if one major firm goes broke, the effect could snowball as others are unable to meet their commitments.
In regulated futures markets, contracts are centrally cleared. If you buy an oil futures contract on Monday, and sell it on Wednesday, you have made your profit (or taken your loss) and you no longer have any stake in whether oil prices rise or fall. But if you buy a credit-default swap on Monday from one firm, and sell an identical swap on Wednesday to another firm, you still face the potential of risk if the party that sold the swap to you is unable to pay when a default occurs, perhaps years later.
“One of the major reasons that the government helped out in the Bear Stearns situation,” Treasury Secretary Henry M. Paulson Jr. testified at a Senate hearing this week, “was to avoid throwing it into bankruptcy with all the credit-default swaps.”
Mr. Paulson said the Federal Reserve Bank of New York was working to develop protocols for that market to deal with a failure of a big player, and indicated that he did not see a need for legislation.
But Christopher Cox, the S.E.C. chairman, said Congress should act. “Neither the S.E.C. nor any regulator has authority over the C.D.S. market, even to require minimum disclosure to the market,” he testified. “The market is ripe for fraud and manipulation,” he added.
The S.E.C. is investigating possible fraud, although no charges have been brought, and is looking for cases where someone may have purchased credit-default swaps to drive up their price and persuade others that a company was in trouble.
The swaps market has been exempt from regulation since it began to grow, thanks to legislation the industry sought. The industry argued that regulation would drive business overseas, and that no regulation was needed because ordinary investors did not trade in the market.
In announcing the decline in the amount of swaps outstanding, Robert Pickel, the chief executive of the trade group, said it reflected industry efforts “to reduce risk by tearing up economically offsetting transactions, and demonstrates the industry’s ongoing commitment to reduce risk and enhance operational efficiency.”
The accompanying charts show the growth of the amount of credit-default swaps outstanding, and show how those totals compare with the total amount of outstanding loans from banks and others to corporations and foreign governments. Even with the decline, the swaps volume is more than three times the debt total.
Floyd Norris comments on finance and economics in his blog at norris.blogs.nytimes.com.
Markets Can’t Wait for Congress to Act By JOE NOCERA
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September 27, 2008
Talking Business
Markets Can’t Wait for Congress to Act By JOE NOCERA
Here we go again.
Just nine days ago — Thursday, Sept. 18 — financial Armageddon was warded off when word began to leak about the government’s giant bailout plan. The news first broke around 2:10 p.m., when Bloomberg moved an article quoting Senator Charles E. Schumer, Democrat of New York, as saying the government was considering a “permanent” plan to address the financial crisis. (In fact, as Mr. Schumer told me later, he had not meant for his words to sound so definitive; he really didn’t know the planning was so far along.)
Then, less than an hour later, CNBC reported that an “R.T.C.-type plan” was being readied by the Treasury Department. That did it. In the time between the Bloomberg article and the CNBC report, the stock market rose 145 points. In a 45-minute burst right after the CNBC report, stocks rose another 270 points. The Dow closed up 410 points.
And by the time Treasury Secretary Henry M. Paulson Jr. made his big speech on Friday morning, laying out some of the details of the government’s $700 billion bailout plan, a good deal of the pressure in the markets had eased. The credit-default swap spreads narrowed on Morgan Stanley and Goldman Sachs, meaning that the credit market was less worried about the possibility that they might default.
Morgan Stanley, which had been frantically negotiating a merger with Wachovia, stopped the negotiations. Money market funds, which had been hit hard by withdrawals earlier in the week, saw an inflow of money. Other credit indicators also suggested that the credit markets were unfreezing.
Here we are a week later, and guess what? Armageddon is again approaching. All week long, the credit-default swap spreads on Morgan Stanley widened, until, by Friday, they were actually worse than they were at any time during the previous week. (And this time, the chief executive, John J. Mack, can’t blame the short-sellers for his troubles, since short-selling in financial stocks has been temporarily banned.)
On Thursday, investment-grade loans were trading lower than junk bonds, because investors were selling off their most liquid assets to raise capital. Wachovia, the nation’s fifth-largest bank holding company, suddenly appeared to be in deep trouble: “Wachovia is trading as if it’s going to fail,” Dave Klein, a manager at Credit Derivatives Research, said on Friday. Washington Mutual was seized by the government. The markets may not be as panicked as they were last week, but with every passing day, the situation is getting increasingly dangerous.
Or, to put it another way, with every passing day, Congress is fiddling while Rome is burning.
Last week, I wrote a column suggesting that the Paulson plan was unlikely to fix the enormous problems facing the financial markets and the country’s faltering economy. I am still not sure it will work — or that it is the best possible solution — but this week, I have a different, more urgent concern.
Whatever its imperfections — and despite the possibility it might not work — it needs to be approved, quickly. I’m praying that by the time the markets open on Monday, Congressional leaders will have reached a consensus on the bailout plan. We’re running out of time.
I know there is something tremendously galling about the prospect of Americans putting $700 billion — or more — of their tax dollars at risk to come to the aid of banks and investment banks whose reckless behavior has so damaged the country. They gamed the system. They lined their pockets. They made terrible, terrible mistakes. I’m as angry about it as you are.
I am also aware that there are lots of smart people who don’t like the bailout plan. On my blog the other day, I posted a letter to the House leadership from more than 200 economists. They complained about what they saw as the plan’s essential unfairness (“The plan is a subsidy to investors at taxpayers’ expense”), its ambiguity (“Neither the mission of the new agency nor its oversight are clear”), and the potential that it might ultimately weaken the very markets it was aimed at saving. The objection of the House Republicans who are currently blocking the plan — namely, that a taxpayer bailout of this magnitude should be avoided if at all possible — also deserves to be taken seriously.
Finally, I’ve been hearing a number of interesting ideas that could well turn out to be better than the Paulson plan. One of the most intriguing ones comes from Andrew Feldstein, the chief executive of Blue Mountain Capital Management, a hedge fund that specializes in credit instruments. He proposes that instead of buying bad assets that are crippling the balance sheets of the nation’s banks, the government should establish a “good bank” that would buy only solid assets.
By setting up such a bank — Mr. Feldstein envisions having the government put up $300 billion and taking an equity stake, so that taxpayers can profit when it is sold after the crisis passes — the government would make it possible for credit to “again flow to deserving borrowers.” Bad banks might eventually fail — but they would have a place to sell their good assets as they liquidate. Healthier institutions could once again start lending. Taxpayers would face much less risk.
If the country had more time, I would argue that we put ideas like that into the sunlight and see if they flower. But we don’t have any more time. Nine days ago, the financial markets were staring into the abyss; the only thing that pulled them back was the news that the Treasury and the Federal Reserve had come up with a bailout plan.
And the only thing that has kept them from falling back is the expectation that the plan will be approved quickly. For a while, it looked as if that was exactly what would happen.
Mr. Paulson and Federal Reserve chairman, Ben S. Bernanke, spent the early part of the week defending the plan before Congress. While they faced tough questioning, their main point came through: they had to act fast, otherwise the economy would crater.
Behind the scenes, Congressional leaders began to hammer out the outline of a deal, with the Democrats insisting on strong oversight for the fund, curbs on executive compensation for institutions that sold off their toxic securities to the government and aid for struggling homeowners, among other things.
On Thursday, after an arduous three-hour meeting, it appeared a deal had been struck, but it quickly fell apart after House Republicans — and Senator John McCain — objected to it. That afternoon, I had a short conversation with Representative Barney Frank, the Democrat from Massachusetts who leads the House Financial Services Committee. He was seething.
“Spencer was in the meeting with us the whole time,” he said. He was referring to Representative Spencer Bachus of Alabama, who was representing the House Republicans in the negotiations. “And now here comes John McCain acting like Andy Kaufman — ‘Here I come to save the day.’ Inserting presidential politics into this is just —— ” He stopped suddenly. Whatever word he had in mind he didn’t want to share with a reporter.
There is no question that a large part of the reason House Republicans are objecting to the Paulson plan is because of the potential loss of taxpayers’ money.
“Putting $700 billion of taxpayers’ money at risk — that’s not something we do every day,” said an aide to the House minority staff (who requested anonymity because he was not authorized to speak for the leadership). Indeed, the proposal offered by Representative John A. Boehner, the House minority leader — to create a government-backed insurance pool to guarantee mortgage-backed securities — is another of those interesting ideas that would deserve merit if there were more time.
But it is also true that much of the opposition to the Paulson plan is purely ideological — there are Republicans who believe that the bailout plan is a step toward socialism. And it appears that they would rather see the economy go down the tubes than do something they find ideologically distasteful.
And that’s what is so infuriating. Henry Paulson is not what you’d call a socialist — nor is Ben Bernanke or President Bush. They are all holding their noses as they sell this plan. Barney Frank is allied with Mr. Paulson and a president he holds in low esteem because he, too, believes this is a step the country has to take.
And so do the markets themselves, which is the most important point of all. Psychology always drives market behavior, and right now, the markets are desperately clinging to the idea that the Paulson plan is the only hope of regaining the confidence of borrowers, lenders and investors. Politics is politics, but the markets are not going to wait forever for a deal to be struck. In fact, I don’t think they are going to wait much past the weekend. No deal, no credit markets. It’s as basic as that.
And if that happens, the consequences will be far more pressing than the failure of a Morgan Stanley or a Goldman Sachs. You won’t be able to get a mortgage. Credit card rates will skyrocket. Businesses will be unable to expand and grow. Unemployment will rise.
Every part of our economy depends on the credit markets. I know you’ve heard it before, but it bears repeating. If we do not claw our way out of this crisis, the country will face a severe recession.
On Friday, the German finance minister, Peer Steinbrück, predicted that America would “lose its superpower status in the global financial system.” He may well turn out to be right, but let’s worry about that later, O.K.?
Right now, our elected representatives need to get down to business and agree to pass the Paulson plan. If they don’t, they — and we — will live to regret it.
Michael M. Grynbaum contributed reporting.
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September 27, 2008
Talking Business
Markets Can’t Wait for Congress to Act By JOE NOCERA
Here we go again.
Just nine days ago — Thursday, Sept. 18 — financial Armageddon was warded off when word began to leak about the government’s giant bailout plan. The news first broke around 2:10 p.m., when Bloomberg moved an article quoting Senator Charles E. Schumer, Democrat of New York, as saying the government was considering a “permanent” plan to address the financial crisis. (In fact, as Mr. Schumer told me later, he had not meant for his words to sound so definitive; he really didn’t know the planning was so far along.)
Then, less than an hour later, CNBC reported that an “R.T.C.-type plan” was being readied by the Treasury Department. That did it. In the time between the Bloomberg article and the CNBC report, the stock market rose 145 points. In a 45-minute burst right after the CNBC report, stocks rose another 270 points. The Dow closed up 410 points.
And by the time Treasury Secretary Henry M. Paulson Jr. made his big speech on Friday morning, laying out some of the details of the government’s $700 billion bailout plan, a good deal of the pressure in the markets had eased. The credit-default swap spreads narrowed on Morgan Stanley and Goldman Sachs, meaning that the credit market was less worried about the possibility that they might default.
Morgan Stanley, which had been frantically negotiating a merger with Wachovia, stopped the negotiations. Money market funds, which had been hit hard by withdrawals earlier in the week, saw an inflow of money. Other credit indicators also suggested that the credit markets were unfreezing.
Here we are a week later, and guess what? Armageddon is again approaching. All week long, the credit-default swap spreads on Morgan Stanley widened, until, by Friday, they were actually worse than they were at any time during the previous week. (And this time, the chief executive, John J. Mack, can’t blame the short-sellers for his troubles, since short-selling in financial stocks has been temporarily banned.)
On Thursday, investment-grade loans were trading lower than junk bonds, because investors were selling off their most liquid assets to raise capital. Wachovia, the nation’s fifth-largest bank holding company, suddenly appeared to be in deep trouble: “Wachovia is trading as if it’s going to fail,” Dave Klein, a manager at Credit Derivatives Research, said on Friday. Washington Mutual was seized by the government. The markets may not be as panicked as they were last week, but with every passing day, the situation is getting increasingly dangerous.
Or, to put it another way, with every passing day, Congress is fiddling while Rome is burning.
Last week, I wrote a column suggesting that the Paulson plan was unlikely to fix the enormous problems facing the financial markets and the country’s faltering economy. I am still not sure it will work — or that it is the best possible solution — but this week, I have a different, more urgent concern.
Whatever its imperfections — and despite the possibility it might not work — it needs to be approved, quickly. I’m praying that by the time the markets open on Monday, Congressional leaders will have reached a consensus on the bailout plan. We’re running out of time.
I know there is something tremendously galling about the prospect of Americans putting $700 billion — or more — of their tax dollars at risk to come to the aid of banks and investment banks whose reckless behavior has so damaged the country. They gamed the system. They lined their pockets. They made terrible, terrible mistakes. I’m as angry about it as you are.
I am also aware that there are lots of smart people who don’t like the bailout plan. On my blog the other day, I posted a letter to the House leadership from more than 200 economists. They complained about what they saw as the plan’s essential unfairness (“The plan is a subsidy to investors at taxpayers’ expense”), its ambiguity (“Neither the mission of the new agency nor its oversight are clear”), and the potential that it might ultimately weaken the very markets it was aimed at saving. The objection of the House Republicans who are currently blocking the plan — namely, that a taxpayer bailout of this magnitude should be avoided if at all possible — also deserves to be taken seriously.
Finally, I’ve been hearing a number of interesting ideas that could well turn out to be better than the Paulson plan. One of the most intriguing ones comes from Andrew Feldstein, the chief executive of Blue Mountain Capital Management, a hedge fund that specializes in credit instruments. He proposes that instead of buying bad assets that are crippling the balance sheets of the nation’s banks, the government should establish a “good bank” that would buy only solid assets.
By setting up such a bank — Mr. Feldstein envisions having the government put up $300 billion and taking an equity stake, so that taxpayers can profit when it is sold after the crisis passes — the government would make it possible for credit to “again flow to deserving borrowers.” Bad banks might eventually fail — but they would have a place to sell their good assets as they liquidate. Healthier institutions could once again start lending. Taxpayers would face much less risk.
If the country had more time, I would argue that we put ideas like that into the sunlight and see if they flower. But we don’t have any more time. Nine days ago, the financial markets were staring into the abyss; the only thing that pulled them back was the news that the Treasury and the Federal Reserve had come up with a bailout plan.
And the only thing that has kept them from falling back is the expectation that the plan will be approved quickly. For a while, it looked as if that was exactly what would happen.
Mr. Paulson and Federal Reserve chairman, Ben S. Bernanke, spent the early part of the week defending the plan before Congress. While they faced tough questioning, their main point came through: they had to act fast, otherwise the economy would crater.
Behind the scenes, Congressional leaders began to hammer out the outline of a deal, with the Democrats insisting on strong oversight for the fund, curbs on executive compensation for institutions that sold off their toxic securities to the government and aid for struggling homeowners, among other things.
On Thursday, after an arduous three-hour meeting, it appeared a deal had been struck, but it quickly fell apart after House Republicans — and Senator John McCain — objected to it. That afternoon, I had a short conversation with Representative Barney Frank, the Democrat from Massachusetts who leads the House Financial Services Committee. He was seething.
“Spencer was in the meeting with us the whole time,” he said. He was referring to Representative Spencer Bachus of Alabama, who was representing the House Republicans in the negotiations. “And now here comes John McCain acting like Andy Kaufman — ‘Here I come to save the day.’ Inserting presidential politics into this is just —— ” He stopped suddenly. Whatever word he had in mind he didn’t want to share with a reporter.
There is no question that a large part of the reason House Republicans are objecting to the Paulson plan is because of the potential loss of taxpayers’ money.
“Putting $700 billion of taxpayers’ money at risk — that’s not something we do every day,” said an aide to the House minority staff (who requested anonymity because he was not authorized to speak for the leadership). Indeed, the proposal offered by Representative John A. Boehner, the House minority leader — to create a government-backed insurance pool to guarantee mortgage-backed securities — is another of those interesting ideas that would deserve merit if there were more time.
But it is also true that much of the opposition to the Paulson plan is purely ideological — there are Republicans who believe that the bailout plan is a step toward socialism. And it appears that they would rather see the economy go down the tubes than do something they find ideologically distasteful.
And that’s what is so infuriating. Henry Paulson is not what you’d call a socialist — nor is Ben Bernanke or President Bush. They are all holding their noses as they sell this plan. Barney Frank is allied with Mr. Paulson and a president he holds in low esteem because he, too, believes this is a step the country has to take.
And so do the markets themselves, which is the most important point of all. Psychology always drives market behavior, and right now, the markets are desperately clinging to the idea that the Paulson plan is the only hope of regaining the confidence of borrowers, lenders and investors. Politics is politics, but the markets are not going to wait forever for a deal to be struck. In fact, I don’t think they are going to wait much past the weekend. No deal, no credit markets. It’s as basic as that.
And if that happens, the consequences will be far more pressing than the failure of a Morgan Stanley or a Goldman Sachs. You won’t be able to get a mortgage. Credit card rates will skyrocket. Businesses will be unable to expand and grow. Unemployment will rise.
Every part of our economy depends on the credit markets. I know you’ve heard it before, but it bears repeating. If we do not claw our way out of this crisis, the country will face a severe recession.
On Friday, the German finance minister, Peer Steinbrück, predicted that America would “lose its superpower status in the global financial system.” He may well turn out to be right, but let’s worry about that later, O.K.?
Right now, our elected representatives need to get down to business and agree to pass the Paulson plan. If they don’t, they — and we — will live to regret it.
Michael M. Grynbaum contributed reporting.
Friday, September 26, 2008
Credit Enters a Lockdown By PETER S. GOODMAN
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September 26, 2008
Economic Memo
Credit Enters a Lockdown By PETER S. GOODMAN
The words coming out of Washington this week about the American financial system have been frightening. But many have raised the possibility that the Bush administration is fear-mongering to gin up support for its $700 billion bailout proposal.
In many corporate offices, in company cafeterias and around dining room tables, however, the reality of tight credit already is limiting daily economic activity.
“Loans are basically frozen due to the credit crisis,” said Vicki Sanger, who is now leaning on personal credit cards bearing double-digit interest rates to finance the building of roads and sidewalks for her residential real estate development in Fruita, Colo. “The banks just are not lending.”
With the economy already suffering the strains of plunging housing prices, growing joblessness and the new-found austerity of debt-saturated consumers, many experts fear the fraying of the financial system could pin the nation in distress for years.
Without a mechanism to shed the bad loans on their books, financial institutions may continue to hoard their dollars and starve the economy of capital. Americans would be deprived of financing to buy houses, send children to college and start businesses. That would slow economic activity further, souring more loans, and making banks tighter still. In short, a downward spiral.
Fear of this outcome has become self-fulfilling, prompting a stampede toward safer investments. Investors continued to pile into Treasury bills on Thursday despite rates of interest near zero, making less capital available for businesses and consumers. Stock markets rallied exuberantly for much of Thursday as a bailout deal appeared in hand. Then the deal stalled, leaving the markets vulnerable to a pullback.
“Without trust and confidence, business can’t go on, and we can easily fall into a deeper recession and eventually a depression,” said Andrew Lo, a finance professor at M.I.T.’s Sloan School of Management. “It would be disastrous to have no plan.”
The Bush administration has hit this message relentlessly. On Capitol Hill, Treasury Secretary Henry M. Paulson Jr. warned of a potential financial seizure without a swift bailout. Federal Reserve Chairman Ben S. Bernanke — an academic authority on the Great Depression — used words generally eschewed by people whose utterances move markets, speaking of a “grave threat.”
In a prime-time television address Wednesday night, President Bush, who has described the strains on the economy as “adjustments,” put it this way: “Our entire economy is in danger.”
The considerable pushback to the bailout reflects discomfort with the people sounding the alarm. Mr. Paulson, a creature of Wall Street, asked Congress for extraordinary powers to take bad loans off the hands of major financial institutions with a proposal that ran all of three pages. Subprime mortgages have been issued with more paperwork than Mr. Paulson filled out in asking for $700 billion.
“The situation is like that movie trailer where a guy with a deep, scary voice says, ‘In a world where credit markets are frozen, where banks refuse to lend to each other at any price, only one man, with one plan can save us,’ “ said Jared Bernstein, senior economist at the labor-oriented Economic Policy Institute in Washington.
And yet, the more he looked at the data, the more Mr. Bernstein became convinced the financial system really does require some sort of bailout. “Things are scary,” he said.
For nonfinancial firms during the first three months of the year, the outstanding balance of so-called commercial paper — short-term IOUs that businesses rely upon to finance their daily operations — was growing by more than 10 percent from a year earlier, according to an analysis of Federal Reserve data by Moody’s Economy.com. From April to June, the balance plunged by more than 9 percent compared with the previous year.
This week, the rate charged by banks for short-term loans to other banks swelled to three percentage points above the most conservative of investments, Treasury bills, with the gap nearly tripling since the beginning of this month. In other words, banks are charging more for even minimal risk, making credit tight.
Suddenly, people who have spent their careers arguing that government is in the way of progress — that its role must be pared to allow market forces to flourish — are calling for the biggest government bailout in American history.
“We are in a very serious place,” said William W. Beach, an economist at the conservative Heritage Foundation in Washington. “There is risk of contagion to the entire economy.”
Even before the stunning events of recent weeks — as the government took over the mortgage giants Fannie Mae and Freddie Mac, Lehman Brothers disintegrated into bankruptcy, and American International Group was saved by an $85 billion government bailout — credit was tight, sowing fears that the economy would suffer.
The demise of those prominent institutions and anxiety over what could happen next has amplified worries considerably.
“The problem is so big that if somebody doesn’t step in, it will cause a panic,” said Michael Moebs, an economist and chief executive of Moebs Services, an independent research company in Lake Bluff, Ill. “Things could worsen to the point that we could see double-digit unemployment.”
This week, Mr. Moebs said he heard from two clients, one a bank and the other a credit union in a small city in the Midwest, now in serious trouble: Both are heavily invested in Lehman, Fannie Mae and Freddie Mac.
“One is going to lose about 80 percent of their capital if they can’t cash those in, and the other is going to lose about half,” Mr. Moebs said.
The credit union is located in a city in which the auto industry is a major employer — an industry now laying off workers. Yet as people try to refinance mortgages to hang on to homes and extend credit cards to pay for gas for their job searches, the local credit union is saying no.
“They have become very restrictive on who they are lending to,” Mr. Moebs said. “They can’t afford a loss. Their risk quotient is next to zero. You have a financial institution that really can’t help out the local people who are having financial difficulties.”
Along the Gulf of Mexico, in Cape Coral, Fla., Michael Pfaff, a mortgage broker, has become accustomed to constant telephone calls from local real estate agents begging for help to save deals in danger of collapsing for lack of finance.
“The underwriters are terrified and they’re dragging their feet, and making more excuses not to close loans,” Mr. Pfaff said. “Basically, they just don’t want the deals.”
Three years ago, when Cape Coral was among the fastest-appreciating real estate markets in the nation, Mr. Pfaff specialized in financing luxury homes with seven-figure price tags. “Now I’m doing a $32,000 loan on a mobile home,” he said.
Finance is still there for people with unblemished credit, he said. Mr. Pfaff recently closed a deal for a couple in Indiana that bought a second house in Cape Coral, a waterfront duplex for $300,000. Their credit score was nearly impeccable, and they had a 20 percent down payment, plus income of nearly $8,000 a month.
For people like that, conditions have actually improved since the government took over the mortgage giants. A month ago, Mr. Pfaff could secure 30-year fixed rate mortgages for about 7 percent. On Thursday, he was quoting 6 percent.
But those with less-than-ideal credit are increasingly shut out of the market, Mr. Pfaff said, and there are an awful lot of those people. So-called hard money loans, for those with problematic credit but large down payments, were easy to arrange as recently as last month.
“That money has just dried up,” Mr. Pfaff said. “I’m afraid. I’m 54 years old, and I’ve seen a lot of hyperventilating in my life, but I absolutely believe that this is a very serious issue.”
Credit Enters a Lockdown
September 26, 2008, 7:54 am
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The words coming out of Washington this week about the American financial system have been frightening. But many have raised the possibility that the Bush administration is fear-mongering to gin up support for its $700 billion bailout proposal.
In many corporate offices, in company cafeterias and around dining room tables, however, the reality of tight credit already is limiting daily economic activity, The New York Times’s Peter S. Goodman says.
“Loans are basically frozen due to the credit crisis,” Vicki Sanger, who is now leaning on personal credit cards bearing double-digit interest rates to finance the building of roads and sidewalks for her residential real estate development in Fruita, Colo., told The Times. “The banks just are not lending.”
With the economy already suffering the strains of plunging housing prices, growing joblessness and the new-found austerity of debt-saturated consumers, many experts fear the fraying of the financial system could pin the nation in distress for years.
Without a mechanism to shed the bad loans on their books, financial institutions may continue to hoard their dollars and starve the economy of capital. Americans would be deprived of financing to buy houses, send children to college and start businesses. That would slow economic activity further, souring more loans, and making banks tighter still. In short, a downward spiral.
Fear of this outcome has become self-fulfilling, prompting a stampede toward safer investments. Investors continued to pile into Treasury bills on Thursday despite rates of interest near zero, making less capital available for businesses and consumers. Stock markets rallied exuberantly for much of Thursday as a bailout deal appeared in hand. Then the deal stalled, leaving the markets vulnerable to a pullback.
“Without trust and confidence, business can’t go on, and we can easily fall into a deeper recession and eventually a depression,” Andrew Lo, a finance professor at M.I.T.’s Sloan School of Management, told The Times. “It would be disastrous to have no plan.”
The Bush administration has hit this message relentlessly. On Capitol Hill, Treasury Secretary Henry M. Paulson Jr. warned of a potential financial seizure without a swift bailout. Federal Reserve Chairman Ben S. Bernanke — an academic authority on the Great Depression — used words generally eschewed by people whose utterances move markets, speaking of a “grave threat.”
In a prime-time television address Wednesday night, President Bush, who has described the strains on the economy as “adjustments,” put it this way: “Our entire economy is in danger.”
The considerable pushback to the bailout reflects discomfort with the people sounding the alarm. Mr. Paulson, a creature of Wall Street, asked Congress for extraordinary powers to take bad loans off the hands of major financial institutions with a proposal that ran all of three pages. Subprime mortgages have been issued with more paperwork than Mr. Paulson filled out in asking for $700 billion.
“The situation is like that movie trailer where a guy with a deep, scary voice says, ‘In a world where credit markets are frozen, where banks refuse to lend to each other at any price, only one man, with one plan can save us,’ “ Jared Bernstein, senior economist at the labor-oriented Economic Policy Institute in Washington, told The Times.
And yet, the more he looked at the data, the more Mr. Bernstein became convinced the financial system really does require some sort of bailout. “Things are scary,” he told The Times.
For nonfinancial firms during the first three months of the year, the outstanding balance of so-called commercial paper — short-term IOUs that businesses rely upon to finance their daily operations — was growing by more than 10 percent from a year earlier, according to an analysis of Federal Reserve data by Moody’s Economy.com. From April to June, the balance plunged by more than 9 percent compared with the previous year.
This week, the rate charged by banks for short-term loans to other banks swelled to three percentage points above the most conservative of investments, Treasury bills, with the gap nearly tripling since the beginning of this month. In other words, banks are charging more for even minimal risk, making credit tight.
Suddenly, people who have spent their careers arguing that government is in the way of progress — that its role must be pared to allow market forces to flourish — are calling for the biggest government bailout in American history.
“We are in a very serious place,” William W. Beach, an economist at the conservative Heritage Foundation in Washington, told The Times. “There is risk of contagion to the entire economy.”
Even before the stunning events of recent weeks — as the government took over the mortgage giants Fannie Mae and Freddie Mac, Lehman Brothers disintegrated into bankruptcy, and American International Group was saved by an $85 billion government bailout — credit was tight, sowing fears that the economy would suffer.
The demise of those prominent institutions and anxiety over what could happen next has amplified worries considerably.
“The problem is so big that if somebody doesn’t step in, it will cause a panic,” Michael Moebs, an economist and chief executive of Moebs Services, an independent research company in Lake Bluff, Ill., told The Times. “Things could worsen to the point that we could see double-digit unemployment.”
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