Afterthoughts : A Primer on the Wall Street Meltdown (update)

Oct 01

Flying into New York, I had the same feeling I had when I arrived in Beirut two years ago, at the height of the Israeli bombing of that city—that of entering a war zone.  The immigration agent, upon learning I taught political economy, commented, “Well, I guess you folks will now be revising all those textbooks?”  The bus driver welcomed passengers with the words, “New York is still here, ladies and gentlemen, but Wall Street has disappeared, like the Twin Towers.”  Even the usually cheerful morning shows feel obligated to begin with the bad news, with one host attributing the bleak events to “the fatcats of Wall Street who turned into pigs.” This city is shellshocked, and most people still have to digest the momentous events of the last two weeks: -$2.3 trillion dollars of investor wealth went up in smoke last week as the Dow Jones Industrial Average registered its worst week ever, plunging 18 percent as investors panicked and kept on unloading stock despite various US government plans to bail out the banks; -The collapse of one of the Street’s most prominent investment banks, Lehman Brothers, followed by the largest bank failure in US history, that of Washington Mutual, the country’s largest savings and loan institution; -Wall Street effectively nationalized, with the Federal Reserve and the Treasury Department making all the major strategic decisions in the financial sector and, with the rescue of the American International Group (AIG), the amazing fact that the US government now runs the world’s biggest insurance company; -Over $8.4 trillion in total market capitalization has been wiped out since October of last year, with over a trillion of this accounted for by the unraveling of Wall Street’s financial titans, and now banks are beginning to totter in Europe as the “American financial virus” spreads. The usual explanations no longer suffice.  Extraordinary events demand extraordinary explanations.  But first… Is the worst over? No, if anything is clear from the contradictory moves of the last week—allowing Lehman Brothers and Washington Mutual to collapse while taking over AIG, and engineering Bank of America’s takeover of Merrill Lynch–there is no strategy to deal with the crisis, just tactical responses, like the fire department’s response to a...

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