Saturday, July 12, 2008

Is Fear the Engine of Collapse?

When Black Friday comes
I'll stand down by the door
And catch the grey men when they
Dive from the fourteenth floor
When Black Friday comes
I'll collect everything I'm owed
And before my friends find out
I'll be on the road
When Black Friday falls you know it's got to be
Don't let it fall on me

That little ditty from Steely Dan was in my mind when the news broke about Indymac Bank going belly up. For some time now, we've been hearing about how this is a "mental recession," to use the words of Phil Gramm. CNN had a quote this morning from Democratic Senator Chris Dodd, talking about Fannie Mae and Freddie Mac and his concerns that needless fear was helping to spark some of the current financial woes.

With the Indymac story, the same CNN piece reported that New York Democratic Senator Chuck Schumer had written a letter back in June (I think) expressing concerns about Indymac's tenuous financial position. Given Schumer's love for publicity, I have little doubt that he issued a press release on it. It appears that a run on Indymac took place shortly afterward, with depositors withdrawing millions of dollars. Surprise, surprise -- then federal regulators take Indymac over yesterday.

I am no financial or economic expert, although I do have a decent grasp of how economics works. I do know that fear can indeed have negative effects in an economy. Our politicians would do well not to fan the flames, but instead do things that will spur economic growth and safeguard against future bank failures. Some banks might even deserve to fail because of their shoddy practices. The market will correct things in time. I am suspicious of government bailouts with the exception of protecting individual depositors.

That's all I'll say for now. In the meantime, let's hope cooler heads prevail. And let's hope that Chuck Schumer can keep his large oral orifice shut. (Fat chance)

1 comment:

Ron said...

One can nearly see how this banking dilemna will be resolved after the first of the year. The Senate Finance Committee will propose legislative change that modify acceptable funding status' of lenders. Problem solved. Temporarily at least. Will the really address lending requirements, such as; you have to be able to afford the payment or you won't be permitted (either the individual or the lending institution) to enter into any leverage contract? The indebtedness our society has assumed is beyond ridiculous. And both the individual and the lending institutions are responsible. I'm no anti-capita;ist, but it appears we have certainly stretched it too far with excessive greed.....and stupidity. Civilizations have fallen on less.