Archive for Friday, October 14, 2011

Author: Economic crisis could have been worse

October 14, 2011

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Even though we’re living in a country with 9 percent unemployment, journalist and author Andrew Ross Sorkin said Thursday that it could have been much, much worse.

“We were looking at 25 percent unemployment in this country,” one year down the road had the nation taken no action in the bank bailouts of 2008, he said.

That figure had been confirmed by Henry Paulson, a former U.S. treasury secretary, as a figure that the government was considering at during the crisis.

Sorkin, who covers mergers and acquisitions for the New York Times, is an anchor on the CNBC television show “Squawk Box” and is the author of the book “Too Big to Fail,” delivered the Kansas University School of Business’ Anderson Chandler Lecture on Thursday.

He took the audience back to 2:30 a.m. on Sept. 18, 2008, 45 minutes after Lehman Bros. failed and after Merrill Lynch agreed to be sold to Bank of America.

When the taxpayers took action to bail out the banks, it was the next dominos that could have fallen that would have been really troublesome, Sorkin said. The people in the room making the decisions for the U.S. government, he said, were really worried that a series of bank bankruptcies would lead to a bigger issue.

“General Electric was going bankrupt next,” he said, taking its 287,000 jobs around the world with it. The effects of that bankruptcy would have been worse than many countries going bankrupt, he said.

The effects could have spread to all kinds of companies, he said.

“All of a sudden, the kid flipping burgers is being affected by the guy in pinstripes,” he said.

Government officials, he said, weren’t extremely forthcoming about the full magnitude of the problem. When he asked stakeholders why, he said the answer was almost always the same.

“If we had actually told the public what we knew, we would have only made it worse,” Sorkin said.

He got the idea to write his book —which was based on interviews with 200 principals involved for more than 500 hours — after waking his wife up at 2:30 a.m. on Sept. 18 and telling her all the things that were going on. It almost was like a movie, he said.

“No, Andrew,” she said. “It’s like a book.”

In the end, they were both right. HBO picked up the book and made a movie that aired earlier this year.

Today, he said, the economy still faces many challenges, and he said if people aren’t paying attention to what’s going on in Europe, they should be.

He said path to recovery would be painful, and whatever the solution is will take a long time. Regardless of people’s political opinions on President Barack Obama’s jobs plan, he said that we don’t need a jobs plan for 12 to 18 months.

“We need a jobs plan for the next decade,” he said.

Everyone in the room, he said, should take some responsibility for how we got here, and he said patience and willingness to withstand an amount of pain will be required to get us out.

“We are the ultimate ADD society, and I would argue we’re getting exactly what we’re paying for,” he said.

Comments

Liberty_One 3 years, 7 months ago

"“We were looking at 25 percent unemployment in this country,” one year down the road had the nation taken no action in the bank bailouts of 2008, he said."

Yes, 25 percent unemployment among bank CEOs. The rest of us would have done just fine. You see, the banks would simply have been liquidated and bought up by those banks that hadn't screwed up. However, it just so happened that the banks that had screwed up and were looking at failing had lots of friends in DC. The real purpose of the bailouts was to protect friends from their mistakes.

thinkinganalytically 3 years, 7 months ago

It is not clear that we would have all been fine. "Simple" liquidation could well take years if not decades to be resolved, and in the meantime the resulting uncertainty would through every financial contract into doubt. It seems very reasonable to think that the unemployment level would have reached as high as it was in the great depression.

thinkinganalytically 3 years, 7 months ago

Why would it have been over faster? Is it not faster to get a sober driver in the car of a drunk person then force the drunk person to sell the car on the open market?

Richard Payton 3 years, 7 months ago

Where's the bail out money that's been paid back to the government? Shouldn't that money have been used to pay down the debt the government now owes. I would shutter to think some Washington policy maker takes that money as a loan never to be paid back. Reminds me of a young college student that wrote a letter to the editor wanting her college loans to be forgiven.

Liberty275 3 years, 7 months ago

Frankly it would be worth the risk of higher unemployment to punish anyone found guilty of crimes that led to the meltdown and suitable civil punishment for financial gurus that got too loose with their investments. Instead, we have set the precedent that the American people will bail out those with clout that leverage themselves into an untenable position and let criminals that abuse the system remain unpunished.

On a related note, GM should have been allowed to go bankrupt to punish union greed. While I would never dispute the rights of unions to negotiate, allowing GM to reorganize would have relieved them going forward from much of the excess the UAW has by virtue of virtual blackmail forced upon our carmakers over the last several decades.

If you push you employer into insolvency, then you get what you deserve.

I practice what I preach. I have made less money of late because business is slow, and I get off the clock and go home so I don't sit doing nothing while my employer pays me. I'd rather lose the money than force my employer to pay me when he isn't making adequate money off my labor. I don't want things I don't earn.

Cant_have_it_both_ways 3 years, 7 months ago

I fully agree on GM. They should have walked away from this company and watched as someone would come in and buy it. Machinery and workforce in place. New rules, new ideas, and new concepts. What we have is the same old crap that got them there in the first place. As for them paying the taxpayer back, I don't believe it. I am sure there has been some creative accounting and other things we will never know about. The problem with the market place is over regulation. No one I knows complains about dirty air or water, but try to do just about anything else with out having to jack with some city, state or federal employee who is afraid to make a decision, pay all the fees and wait for a couple of years. No wonder businesses are moving off shore.

jafs 3 years, 7 months ago

According to testimony before Congress, total union wages and benefits accounted for about 10% of their overall expenses.

And, unions did in fact make a number of concessions to the automakers as well.

camper 3 years, 7 months ago

From Wikipedia

Of the $245 billion invested in U.S. banks, over $169 billion has been paid back, including $13.7 billion in dividends, interest and other income, along with $4 billion in warrant proceeds as of April 2010[update].

Originally expected to cost the U.S. taxpayers as much as $300 billion,[1] by December 16, 2010, the Congressional Budget Office (CBO) estimated the total cost would be $25 billion,[2] although Treasury Secretary Timothy Geithner argued that the final cost would be still lower.[3] This is significantly less than the taxpayers' cost of the savings and loan crisis of the late 1980s

camper 3 years, 7 months ago

I did a google search. I am by no means an expert, but I have heard that part of the TARP bailouts were repaid. I am also not happy about TARP and the financial crisis, but I thought risking a full-on financial collapse and a potential bank run would be the worst alternative. I also believe we need to seek long-term solutions and shared pain to emergefrom this mess. Even if we need prevent a possible dominoe effect by these short term ie jobs bill. The speaker is right. If we pay attention to Europe, austerity does not seem to be the answer.

Carol Bowen 3 years, 7 months ago

TARP has been paid off and is turning a slight profit. TARP only bailed out the big guys. See

http://money.cnn.com/2011/03/30/news/economy/tarp_program/index.htm

Steve Jacob 3 years, 7 months ago

I totally agree, the bailouts had to be done, unpopular as they where. Bush's best moment, he stepped aside and let Paulson do his thing. No bank was safe, bank runs where happening. I

Flap Doodle 3 years, 7 months ago

Oh, that's a ringing endorsement for the current regime.

Sigmund 3 years, 7 months ago

“We were looking at 25 percent unemployment in this country,” one year down the road had the nation taken no action in the bank bailouts of 2008, he said."

Much closer to what was said (paraphrased) he "had a off the record meeting with someone at Treasury/Fed who projected a 24% unemployment if nothing was done." It wasn't clear if this was the same person who also predicted no more than 8% unemployment if the stimulus was passed. As Yogi Berra famously said, "Prediction if very hard, especially of the future."

The more interesting moments came when he discussed what countries, states, and cities are too big to fail, the Eurozone will probably not get bailed out, to big to fail also means "too big to manage," there is more concentration in banking now than in 2008, and that Fannie/Freddie should be phased out (or at least not backed by US Taxpayers).

What was not discussed, and I wished had, is does the policy of to big to fail create a moral hazard encouraging risk taking where profits are private but losses are covered by the tax payers and if companies are now too big to manage what makes him confident that the US economy isn't too big to be effectively managed by the Treasury and Federal Reserve.

I would have also liked some discussion of his belief in Keynesian economics in light of the recent Nobel Prize in Economics being awarded to Sargent and Sims whose works independently showed why government stimulus do not work as intended. "Sargent’s work suggests that government stimulus programs such as those advocated by John Maynard Keynes have a limited effect on the economy because consumers and companies realize the measures will be temporary." http://www.businessweek.com/news/2011-10-10/nyu-s-sargent-princeton-s-sims-win-nobel-prize-in-economics.html

Mike Ford 3 years, 7 months ago

lies sell well to those who don't accept reality.....they don't accept the reality that somewhere in east Texas walks a man with an acute inability to speak publically who wrongly convinced a bunch of draft dodging neocon hawks to invade countries that had little or nothing to do with 9/11 and ran up huge debt borrowing from China instead of raising taxes or selling war bonds as in previous conflicts. I sure felt confident to live within my means when this dimwit told people to keep mortgaging their homes for the suv's, scond homes and the like after 9/11...you say solyndra...I sat haliburton... you want to keep your denial and lay this at Obama's feet I'll remind you over the objections of your amnesia who started this mess....$12 TRILLION of this debt existed before Obama....please remember this through your denial....

tbaker 3 years, 7 months ago

So if the government hadn't bailed out the banks, we would have had 25% unemployment for a year. So I guess that means the 10% unemployment we've had for several years is somehow a better deal? Our constitution provides a solution for problems like these - bankruptcy. Free markets are not supposed to reward failure. Allowing poorly ran business to fail and go bankrupt protects all of us because the market is then allowed to function by buying up the portions of the companies that still have value, and disposing of the rest. In the end, the consumer gets better-ran companies and ; more value for the money we all spend. When business failure is protected by the government, the market cannot correct the problems; poorly ran companies/banks remain. The same people (politicians and business people) who caused the terrible economic disaster in 2008 are still in their jobs. Spending tax dollars we have to borrow to “bail” them out just guarantees the problem has not been fixed and those who caused it remain in their positions able to create the next disaster we will all have to pay for.

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