Tuesday, September 16, 2008

Wall Street Gone Wild

When I wrote the previous posting, I never thought that Lehman would file for bankruptcy and Merrill Lynch was sold. The financial market was bad, but I never expect those giants to go under --at least, not that quick. But in the last two days, we've seen the Wall Street gone wild.

Which brings me to a question: does the series of the US government bailouts work at all? We know ex post that the bailouts to Bear Stearns and Freddie Mac and Fannie Mae do not prevent the adverse effect of the subprime mortgage fiasco to the whole structure of financial market as seen from the fall of Lehman and Merrill. But do we know ex ante that should the government not bail them out at that time, things would get better?

The two presidential candidates here, being a politician, are quick to blame and ask for more regulations on the market. But I think the best regulation, as unfortunate as it may sound, is to let the market send companies, even as big as Lehman, to bankruptcy if it's deemed necessary. At the moment, market painfully learns that nothing is too big to be failed --which is a very good lesson, by the way --so next time they themselves need to ensure that everything is in check, even without regulatory bodies that at times were simply dysfunctional and full of political clouts.

Yet it seems that the US government, perhaps after observing 500 points Dow Jones Index drop in as single day without any improving sentiment at sight, may have different idea. The latest news tells that for the time being the Fed asked Goldman Sachs and JP Morgan Chase to help AIG, the deep-troubling big insurance company in the country.

Stay tuned.


  1. I go with you. When the company can't survive with their "liquidity on hand", the collapse is better than anything. The US government seems to be panic since thousands can be jobless. But it also looks a political policy. I guess the US government isn't as naive as one.

  2. ardnirajaf, to be fair to the US government, they have a good reason not to let those big names collapse and drag the financial market down, that is, to prevent severe credit crunch and subsequent output contraction.

    Ben Bernanke is famous in his study on the great depression and the following credit crunch. It'd be interesting to see what the Fed will do in their meeting today.

  3. "Filing bankruptcy is considered the choice of last resort for debt relief." ;-) smart jewish bankers?

    while merrill (catholic perhaps) is being eaten by 'the best treasury bank'.

  4. "When I wrote the previous posting, I never thought that Lehman would file for bankruptcy and Merrill Lynch was sold."
    Rizal, i think you've got the feeling. ;-)

  5. When Lehman filed for bankruptcy on Monday, ft.com said that this is the end of a decade of moral hazard (i.e. government bailing out private institution, thus “allowing” them to take excessive risk – knowing that the govt will bail them out).

    Wonder what FT will say now after AIG’s case. Too big to fail? saving thousands of jobs?

    You're right indeed >> stay tuned >> and pray these events won't infect Jakarta (u wish)