The Economic Downturn

News that Japan's economy shrank at an annual rate of 12.7 percent in the last three months of the year and that Germany's economy contracted 2.1 percent capped a dismal year for the global economy.

Source: The Washington Post, February 18, 2009

Comment: There were three relatively good quarters last year, so the year long data shown in the graph above does not really capture the pain we are experiencing in this quarter. From what I can read, the stimulus packages are not likely to have much effect in the next quarter either. Bumpy road ahead!

Frontline has a show titled "Inside the Meltdown" tracking the history of the economic meltdown of last year, which we are still experiencing. Good program. I note some things which I took together:

• Henry Paulson, Bush's final Secretary of the Treasury, is described as having been very angry at Dick Fuld, the CEO of Lehman Brothers, as the firm went into crisis last Fall. Apparently Paulson had warned Fuld that the firm was in trouble and that he should sell the firm, advice that had not been followed.
• When the firm went into crisis comparable to that which had resulted in the Bail out of Bear Stearns, Paulson weighed the options of a bailout or letting the firm go into bankruptcy.
• He was worried about Moral Hazard if there was a bailout and about instability of the financial system if the firm went into bankruptcy.
• Paulson is not an economist. After an early career in politics (including a stint as assistant to John Ehrlichman from 1972 to 1973, during the events of the Watergate scandal for which Ehrlichman was convicted, and sentenced to prison) he joined and rose to the position of CEO of Goldman Sachs. He was both a conservative Republican and a strong believer in free markets and a limited role of government in banking.
• Paulson concluded that the risk of moral hazard was worse than that of destabilization of the financial system.
• Not only did he lead in the government's decision to let Lehman Brothers go into bankruptcy, but he intervened personally to keep the price at which Lehman Brothers shares were liquidated in the final sale of the firm at the very low value of $2 per share.
• He was wrong about the danger of destabilization, and the bankruptcy led to a contagion which is still rippling through the financial system and the world economy.

That sounds like a very bad mistake was made by the lead man of the Bush (43) administration, perhaps based on emotion, lack of in-depth economic understanding, arrogance, and commitment to conservative economic ideology. Arghhh!! JAD