The interview, conducted by David Leonhardt, covers several economic issues including the role of financial institutions, the need for new financial regulation, making education relevant, how to improve global competitiveness, how to achieve greater gender and employment equality, and the need and difficulty of achieving health care reform.

Whew!  Just writing that sentence makes me gasp.

While After the Great Recession is a very long (two cups of coffee) article, I believe it is well worth reading, in its entirety. Whether or not you supported Barack Obama in the presidential election last November, I think it’s important to understand where he plans to take the country.

If you don’t have time to read the entire article, here are some relevant quotes.

I. The Future of Finance

Leonhardt: I wonder if you would be willing to describe a little bit of your learning curve about finance, and what you envision finance being in tomorrow’s economy: Does it need to be smaller? Will it inevitably be smaller?

THE PRESIDENT:  …What I think will change, what I think was an aberration, was a situation where corporate profits in the financial sector were such a heavy part of our overall profitability over the last decade. That I think will change. And so part of that has to do with the effects of regulation that will inhibit some of the massive leveraging and the massive risk-taking that had become so common.

Now, in some ways, I think it’s important to understand that some of that wealth was illusory in the first place.

… Wall Street will remain a big, important part of our economy, just as it was in the ’70s and the ’80s. It just won’t be half of our economy. And that means that more talent, more resources will be going to other sectors of the economy. And I actually think that’s healthy. We don’t want every single college grad with mathematical aptitude to become a derivatives trader. We want some of them to go into engineering, and we want some of them to be going into computer design.

And so I think what you’ll see is some shift, but I don’t think that we will lose the enormous advantages that come from transparency, openness, the reliability of our markets. If anything, a more vigorous regulatory regime, I think, will help restore confidence, and you’re still going to see a lot of global capital wanting to park itself in the United States.

Leonhardt:  There was this great debate among F.D.R.’s advisers about whether you had to split up companies — not just banks — you had to split up companies in order to regulate them effectively, or whether it was possible to have big, huge, sprawling, powerful companies — even not just possible, but better — and then have strong regulators. And it seems to me there’s an analogy of that debate now. Which is, do you think it is O.K. to have these “supermarkets” regulated by strong regulators actually trying to regulate, or do we need some very different modern version of Glass-Steagall.

THE PRESIDENT: You know, I’ve looked at the evidence so far that indicates that other countries that have not seen some of the problems in their financial markets that we have nevertheless don’t separate between investment banks and commercial banks, for example. They have a “supermarket” model that they’ve got strong regulation of.

But when it comes to something like investment banking versus commercial banking, the experience in a country like Canada would indicate that good, strong regulation that focuses less on the legal form of the institution and more on the functions that they’re carrying out is probably the right approach to take.

II. The Ticket to the Middle Class

Leonhardt:  I’m curious what you think today’s ticket to the middle class is. Do you want everybody aspiring to a four-year-college degree? Is a two-year or vocational degree enough? Or is simply attending college, whether or not you graduate, sufficient to reach the middle class?

THE PRESIDENT:  We set out a goal in my speech to the joint session that said everybody should have at least one year of post-high-school training. And I think it would be too rigid to say everybody needs a four-year-college degree. I think everybody needs enough post-high-school training that they are competent in fields that require technical expertise, because it’s very hard to imagine getting a job that pays a living wage without that — or it’s very hard at least to envision a steady job in the absence of that.

And so to the extent that we can upgrade not only our high schools but also our community colleges to provide a sound technical basis for being able to perform complicated tasks in a 21st-century economy, then I think that not only is that good for the individuals, but that’s going to be critical for the economy as a whole.

But, again, I think the big challenge that we’ve got on education is making sure that … you are actually learning the kinds of skills that make you competitive and productive in a modern, technological economy.

That’s why I don’t just want to see more college graduates; I also want to specifically see more math and science graduates, I specifically want to see more folks in engineering.

But the broader point is that if you look at who our long-term competition will be in the global economy — China, India, the E.U., Brazil, Korea — the countries that are producing the best-educated work force, whose education system emphasizes the sciences and mathematics, who can translate those technology backgrounds or those science backgrounds into technological applications, they are going to have a significant advantage in the economy. And I think that we’ve got to have enough of that in order to maintain our economic strength.

III. The New Gender Gap

Leonhardt: There is still sexism, there’s still a pay gap, clearly, but the pay of men has stagnated, and the pay of women has gone up.

I think there are a lot of men out there today, working at G.M. and Chrysler and other places, who feel the same kind of dejection that your grandfather did. What do you think the future of work looks like for men?

THE PRESIDENT: I think it’s an interesting question, because as I said, you know, you go in to factories all across the Midwest and you talk to the men who work there — they’ve got extraordinary skill and extraordinary pride in what they make. And I think that for them, the loss of manufacturing is a loss of a way of life and not just a loss of income.

I think a healthy economy is going to have a broad mix of jobs, and there has to be a place for somebody with terrific mechanical aptitude who can perform highly skilled tasks with his hands, whether it’s in construction or manufacturing. And I don’t think that those jobs should vanish. I do think that they will constitute a smaller percentage of the overall economy.

I mean, nursing, teaching are all areas where we need more men. I’ve always said if we can get more men in the classroom, particularly in inner cities where a lot of young people don’t have fathers, that could be of enormous benefit.

IV. Where the Economists are Coming From

Leonhardt:  When you and I spoke during the campaign, you made it clear that you had thought a lot about the economic debates within the Clinton administration. And you said that you wanted to have a Robert Rubin type and a Robert Reich type having a vigorous debate in front of you. And clearly you have a spectrum of Democrats within your economic-policy team.

THE PRESIDENT:  … I’ve been constantly searching for is a ruthless pragmatism when it comes to economic policy.

Somebody who has enormous influence over my thinking is Paul Volcker, who is robust enough that, having presided over the Carter and Reagan years, he’s still sharp as a tack and able to give me huge advice and to provide some counterbalance.

When I first started having a round table of economic advisers, and Bob Reich was part of that, and he was sitting across the table from Bob Rubin and others, what you discovered was that some of the rifts that had existed back in the Clinton years had really narrowed drastically.

If anything, the only thing I notice, I think, that I do think is something of a carry-over from Bob Rubin — I see it in Larry, I see it in Tim — is a great appreciation of complexity.

… I think that one of the things that we all agree to is that the touchstone for economic policy is, does it allow the average American to find good employment and see their incomes rise; that we can’t just look at things in the aggregate, we do want to grow the pie, but we want to make sure that prosperity is spread across the spectrum of regions and occupations and genders and races; and that economic policy should focus on growing the pie, but it also has to make sure that everybody has got opportunity in that system.

I also think that there’s very little disagreement that there are lessons to be learned from this crisis in terms of the importance of regulation in the financial markets. And I think that this notion that there is somehow resistance to that — to those lessons within my economic team — just isn’t borne out by the discussions that I have every day.

… As we’re making economic policy, I think there is a certain humility about the consequences of the actions we take, intended and unintended, that may make some outside observers impatient. I mean, you’ll recall Geithner was just getting hammered for months. But he, I think, is very secure in saying we need to get these things right, and if we act too abruptly, we can end up doing more harm than good. Those are qualities that I think have been useful.

V. Postreform Health Care

Leonhardt:  You have suggested that health care is now the No. 1 legislative priority. It seems to me this is only a small generalization — to say that the way the medical system works now is, people go to the doctor; the doctor tells them what treatments they need; they get those treatments, regardless of cost or, frankly, regardless of whether they’re effective. I wonder if you could talk to people about how going to the doctor will be different in the future; how they will experience medical care differently on the other side of health care reform.

THE PRESIDENT:  First of all, I do think consumers have gotten more active in their own treatments in a way that’s very useful. And I think that should continue to be encouraged, to the extent that we can provide consumers with more information about their own well-being — that, I think, can be helpful.

I have always said, though, that we should not overstate the degree to which consumers rather than doctors are going to be driving treatment, because, I just speak from my own experience, I’m a pretty-well-educated layperson when it comes to medical care; I know how to ask good questions of my doctor. But ultimately, he’s the guy with the medical degree. So, if he tells me, You know what, you’ve got such-and-such and you need to take such-and-such, I don’t go around arguing with him or go online to see if I can find a better opinion than his.

And so, in that sense, there’s always going to be an asymmetry of information between patient and provider. And part of what I think government can do effectively is to be an honest broker in assessing and evaluating treatment options. And certainly that’s true when it comes to Medicare and Medicaid, where the taxpayers are footing the bill and we have an obligation to get those costs under control.

So when Peter Orszag and I talk about the importance of using comparative-effectiveness studies as a way of reining in costs, that’s not an attempt to micromanage the doctor-patient relationship. It is an attempt to say to patients, you know what, we’ve looked at some objective studies out here, people who know about this stuff, concluding that the blue pill, which costs half as much as the red pill, is just as effective, and you might want to go ahead and get the blue one. And if a provider is pushing the red one on you, then you should at least ask some important questions.

Now, there are distortions in the system, everything from the drug salesmen and junkets to how reimbursements occur. Some of those things government has control over; some of those things are just more embedded in our medical culture. But the doctors I know — both ones who treat me as well as friends of mine — I think take their job very seriously and are thinking in terms of what’s best for the patient. They operate within particular incentive structures, like anybody else, and particular habits, like anybody else.

And so if it turns out that doctors in Florida are spending 25 percent more on treating their patients as doctors in Minnesota, and the doctors in Minnesota are getting outcomes that are just as good — then us going down to Florida and pointing out that this is how folks in Minnesota are doing it and they seem to be getting pretty good outcomes, and are there particular reasons why you’re doing what you’re doing? — I think that conversation will ultimately yield some significant savings and some significant benefits.

Now, I actually think that the tougher issue around medical care — it’s a related one — is what you do around things like end-of-life care —

So that’s where I think you just get into some very difficult moral issues. But that’s also a huge driver of cost, right?

I mean, the chronically ill and those toward the end of their lives are accounting for potentially 80 percent of the total health care bill out here.

Leonhardt:  So how do you — how do we deal with it?

THE PRESIDENT:  Well, I think that there is going to have to be a conversation that is guided by doctors, scientists, ethicists. And then there is going to have to be a very difficult democratic conversation that takes place. It is very difficult to imagine the country making those decisions just through the normal political channels. And that’s part of why you have to have some independent group that can give you guidance. It’s not determinative, but I think has to be able to give you some guidance. And that’s part of what I suspect you’ll see emerging out of the various health care conversations that are taking place on the Hill right now.

VI. Out of the Rough?

Leonhardt:  Do you think this recession is a big-enough event to make us as a country willing to make some of the sorts of hard choices that we need to make on health care, on taxes in the long term — which will not cover the cost of government — on energy? Traditionally those choices get made in times of depression or war, and I’m not sure whether this rises to that level.

THE PRESIDENT:  Well, part of it will depend on leadership. So I’ve got to make some good arguments out there. And that’s what I’ve been trying to do since I came in, is to say now is the time for us to make some tough, big decisions.

The critics have said, you’re doing too much, you can’t do all this at once, Congress can’t digest everything. I just reject that. There’s nothing inherent in our political process that should prevent us from making these difficult decisions now, as opposed to 10 years from now or 20 years from now.

It is true that as tough an economic time as it is right now, we haven’t had 42 months of 20, 30 percent unemployment. And so the degree of desperation and the shock to the system may not be as great. And that means that there’s going to be more resistance to any of these steps: reforming the financial system or reforming our health care system or doing something about energy. On each of these things — you know, things aren’t so bad in the eyes of a lot of Americans that they say, “We’re willing to completely try something new.”

But part of my job I think is to bridge that gap between the status quo and what we know we have to do for our future.

Leonhardt:  Are you worried that the economic cycle will make that much harder? I mean, Roosevelt took office four years after the stock market crashed. You took office four months after Lehman Brothers collapsed. At some point people may start saying, Hey, why aren’t things getting better?

THE PRESIDENT:  It’s something that we think about. I knew even before the election that this was going to be a very difficult journey and that the economy had gone through a sufficient shock and that it wasn’t going to recover right away.

What I’m very confident about is that given the difficult options before us, we are making good, thoughtful decisions. I have enormous confidence that we are weighing all our options and we are making the best choices. That doesn’t mean that every choice is going to be right, is going to work exactly the way we want it to. But I wake up in the morning and go to bed at night feeling that the direction we are trying to move the economy toward is the right one and that the decisions we make are sound.

Conclusion

In watching political commentary on PBS TV, for example Charlie Rose’s interview with David Brooks, I have heard time and time again how confident President Obama is, how comfortable he is with debate within his administration, and how he is a supreme pragmatist. These are all good things.

The phrases that jumped out on me in the interview were: “ruthless pragmatism,” “a great appreciation of complexity,” and “a certain humility about the consequences of the actions we take, intended and unintended.”

Good. Boldness and supreme confidence seasoned with a dash of humility and a modicum of caution sounds like a good recipe to me.

That said, he certainly has more issues to deal with than any other president ever had. And this interview was only about economic issues, totaling omitting foreign affairs – “little” things like two wars, Iranian nuclear aspirations, the potential collapse of Pakistan’s government, etc., etc., etc.

Good luck, Mr. President.

Photo by Nadav Kander for The New York Times.

It is clear that, despite the various proposals, the previous administration did very little to alleviate the problem. It’s also clear that it is now a matter of some urgency for the new Obama administration.

The February 19th New York Times article, $275 Billion Plan Seeks to Address Housing Crisis leads with this, “President Obama announced a plan on Wednesday to help as many as nine million American homeowners refinance their mortgages or avert foreclosure, saying that it would shore up housing prices, stabilize neighborhoods and slow a downward spiral released his proposal…” and summarizes it as follows:

The plan has three components. The first would help homeowners who are still current on their payments, but who are paying high interest rates and cannot refinance because they do not have enough equity in their homes, a problem afflicting growing numbers of people as housing values tumble.

A second component would assist about four million people who are at risk of losing their homes. It would provide incentives to lenders who alter the terms of loans to make them affordable for the troubled borrowers. A third component would try to increase the credit available for mortgages in general by giving $200 billion of additional financial backing to Fannie Mae and Freddie Mac.

Beyond luring lenders with government money, the plan also calls on Congress to give bankruptcy judges the power to change the terms of mortgages and reduce the monthly payments.

Questions of fairness and efficacy were immediately raised. While some have criticized the plan as not doing enough, Edward L. Glaeser, a Harvard University economist, believes that one virtue is that it does not try to solve every problem.

For his assessment of the advantages and shortcomings of the Obama initiative, read Housing Plan: The Virtues of Moderation which was published online.

Conclusion

In my opinion, most of the issues facing the Obama administration (and therefore all U.S. citizens) are more complicated than it first appears. Given the depth and breadth of our financial problems, we need reasoned arguments and a nuanced assessment of any new plan. We do not need knee-jerk responses, either pro or con.

Whatever the proposal on the table, there is always room for improvement, and certainly, more initiatives will be needed. We desperately need constructive criticism and cooperation. Professor Glaeser’s analysis delivers a useful starting point.

In How to Repair a Broken Financial World, Michael Lewis and David Einhorn lay out their policy prescriptions.

There are other things the Treasury might do when a major financial firm assumed to be “too big to fail” comes knocking, asking for free money. Here’s one: Let it fail.

Not as chaotically as Lehman Brothers was allowed to fail. If a failing firm is deemed “too big” for that honor, then it should be explicitly nationalized, both to limit its effect on other firms and to protect the guts of the system. Its shareholders should be wiped out, and its management replaced. Its valuable parts should be sold off as functioning businesses to the highest bidders — perhaps to some bank that was not swept up in the credit bubble. The rest should be liquidated, in calm markets. Do this and, for everyone except the firms that invented the mess, the pain will likely subside.

This is more plausible than it may sound. Sweden, of all places, did it successfully in 1992. And remember, the Federal Reserve and the Treasury have already accepted, on behalf of the taxpayer, just about all of the downside risk of owning the bigger financial firms.

If we are going to spend trillions of dollars of taxpayer money, it makes more sense to focus less on the failed institutions at the top of the financial system and more on the individuals at the bottom. Instead of buying dodgy assets and guaranteeing deals that should never have been made in the first place, we should use our money to A) repair the social safety net, now badly rent in ways that cause perfectly rational people to be terrified; and B) transform the bailout of the banks into a rescue of homeowners.

There are also a handful of other perfectly obvious changes in the financial system to be made, to prevent some version of what has happened from happening all over again. A short list:

Stop making big regulatory decisions with long-term consequences based on their short-term effect on stock prices. Stock prices go up and down: let them. An absurd number of the official crises have been negotiated and resolved over weekends so that they may be presented as a fait accompli “before the Asian markets open.” The hasty crisis-to-crisis policy decision-making lacks coherence for the obvious reason that it is more or less driven by a desire to please the stock market. The Treasury, the Federal Reserve and the S.E.C. all seem to view propping up stock prices as a critical part of their mission — indeed, the Federal Reserve sometimes seems more concerned than the average Wall Street trader with the market’s day-to-day movements. If the policies are sound, the stock market will eventually learn to take care of itself.

End the official status of the rating agencies. Given their performance it’s hard to believe credit rating agencies are still around. There’s no question that the world is worse off for the existence of companies like Moody’s and Standard & Poor’s. There should be a rule against issuers paying for ratings. Either investors should pay for them privately or, if public ratings are deemed essential, they should be publicly provided.

Regulate credit-default swaps. There are now tens of trillions of dollars in these contracts between big financial firms. An awful lot of the bad stuff that has happened to our financial system has happened because it was never explained in plain, simple language. Financial innovators were able to create new products and markets without anyone thinking too much about their broader financial consequences — and without regulators knowing very much about them at all. It doesn’t matter how transparent financial markets are if no one can understand what’s inside them. Until very recently, companies haven’t had to provide even cursory disclosure of credit-default swaps in their financial statements.

Credit-default swaps may not be Exhibit No. 1 in the case against financial complexity, but they are useful evidence. Whatever credit defaults are in theory, in practice they have become mainly side bets on whether some company, or some subprime mortgage-backed bond, some municipality, or even the United States government will go bust. In the extreme case, subprime mortgage bonds were created so that smart investors, using credit-default swaps, could bet against them. Call it insurance if you like, but it’s not the insurance most people know. It’s more like buying fire insurance on your neighbor’s house, possibly for many times the value of that house — from a company that probably doesn’t have any real ability to pay you if someone sets fire to the whole neighborhood. The most critical role for regulation is to make sure that the sellers of risk have the capital to support their bets.

Impose new capital requirements on banks. … A better idea would be to require banks to hold less capital in bad times and more capital in good times. Now that we have seen how too-big-to-fail financial institutions behave, it is clear that relieving them of stringent requirements is not the way to go.

Another good solution to the too-big-to-fail problem is to break up any institution that becomes too big to fail.

Close the revolving door between the S.E.C. and Wall Street. At every turn we keep coming back to an enormous barrier to reform: Wall Street’s political influence. Its influence over the S.E.C. is further compromised by its ability to enrich the people who work for it. Realistically, there is only so much that can be done to fix the problem, but one measure is obvious: forbid regulators, for some meaningful amount of time after they have left the S.E.C., from accepting high-paying jobs with Wall Street firms.

But keep the door open the other way. If the S.E.C. is to restore its credibility as an investor protection agency, it should have some experienced, respected investors (which is not the same thing as investment bankers) as commissioners. President-elect Barack Obama should nominate at least one with a notable career investing capital, and another with experience uncovering corporate misconduct. As it happens, the most critical job, chief of enforcement, now has a perfect candidate, a civic-minded former investor with firsthand experience of the S.E.C.’s ineptitude: Harry Markopolos.

The funny thing is, there’s nothing all that radical about most of these changes. A disinterested person would probably wonder why many of them had not been made long ago. A committee of people whose financial interests are somehow bound up with Wall Street is a different matter.

Conclusion

The articles by Michael Lewis and David Einhorn are well written, providing extremely useful context. And they make very sensible recommendations. However, the “Financial Crisis” goes well beyond the United States. Any negative effects felt within the U.S. economy quickly spread far and wide. As we know now, the sub-prime problem in the U.S. negatively impacted the economies of many countries, even bankrupting the economy of Iceland.

Therefore any comprehensive solution needs to encompass all of the intertwined global economies. We cannot solve our economic problems on a nation by nation basis. A global approach to monitoring (and regulating) the financial sector is essential in order to avoid another “Financial Crisis.”

In previous posts (here and here), I wrote about the poor job some investment banks did in risk management and how they ended up “owning exotic securities, derivatives, pieces of paper backed by pools of assets. They did not understand these securities any better than the people they sold them to.

An article in today’s New York Times, The Reckoning – Citigroup Pays for a Rush to Risk, by Eric Dash and Julie Creswell goes behind the scenes to explain just how bad things were. What is fascinating is that the article names names, i.e. the people who were trading the securities and the risk managers, who failed to rein them in.

Of course, top management was ultimately responsible for the debacle.  Looking back, one question comes to mind, “What were they thinking?” The authors answer that question.

Here are extensive quotes from the article.

In September 2007, with Wall Street confronting a crisis caused by too many souring mortgages, Citigroup executives gathered in a wood-paneled library to assess their own well-being.

There, Citigroup’s chief executive, Charles O. Prince III, learned for the first time that the bank owned about $43 billion in mortgage-related assets. He asked Thomas G. Maheras, who oversaw trading at the bank, whether everything was O.K.

Mr. Maheras told his boss that no big losses were looming, according to people briefed on the meeting who would speak only on the condition that they not be named.

For months, Mr. Maheras’s reassurances to others at Citigroup had quieted internal concerns about the bank’s vulnerabilities. But this time, a risk-management team was dispatched to more rigorously examine Citigroup’s huge mortgage-related holdings. They were too late, however: within several weeks, Citigroup would announce billions of dollars in losses.

Normally, a big bank would never allow the word of just one executive to carry so much weight. Instead, it would have its risk managers aggressively look over any shoulder and guard against trading or lending excesses.

But many Citigroup insiders say the bank’s risk managers never investigated deeply enough. Because of longstanding ties that clouded their judgment, the very people charged with overseeing deal makers eager to increase short-term earnings — and executives’ multimillion-dollar bonuses — failed to rein them in, these insiders say.

Today, Citigroup, once the nation’s largest and mightiest financial institution, has been brought to its knees by more than $65 billion in losses, write-downs for troubled assets and charges to account for future losses. More than half of that amount stems from mortgage-related securities created by Mr. Maheras’s team — the same products Mr. Prince was briefed on during that 2007 meeting.

Citigroup’s stock has plummeted to its lowest price in more than a decade, closing Friday at $3.77. At that price the company is worth just $20.5 billion, down from $244 billion two years ago. Waves of layoffs have accompanied that slide, with about 75,000 jobs already gone or set to disappear from a work force that numbered about 375,000 a year ago.

While much of the damage inflicted on Citigroup and the broader economy was caused by errant, high-octane trading and lax oversight, critics say, blame also reaches into the highest levels at the bank. Earlier this year, the Federal Reserve took the bank to task for poor oversight and risk controls in a report it sent to Citigroup.

The bank’s downfall was years in the making and involved many in its hierarchy, particularly Mr. Prince and Robert E. Rubin, an influential director and senior adviser.

Citigroup insiders and analysts say that Mr. Prince and Mr. Rubin played pivotal roles in the bank’s current woes, by drafting and blessing a strategy that involved taking greater trading risks to expand its business and reap higher profits. Mr. Prince and Mr. Rubin both declined to comment for this article.

For a time, Citigroup’s megabank model paid off handsomely, as it rang up billions in earnings each quarter from credit cards, mortgages, merger advice and trading.

But when Citigroup’s trading machine began churning out billions of dollars in mortgage-related securities, it courted disaster. As it built up that business, it used accounting maneuvers to move billions of dollars of the troubled assets off its books, freeing capital so the bank could grow even larger. Because of pending accounting changes, Citigroup and other banks have been bringing those assets back in-house, raising concerns about a new round of potential losses.

To some, the misery at Citigroup is no surprise. Lynn Turner, a former chief accountant with the Securities and Exchange Commission, said the bank’s balkanized culture and pell-mell management made problems inevitable.

“If you’re an entity of this size,” he said, “if you don’t have controls, if you don’t have the right culture and you don’t have people accountable for the risks that they are taking, you’re Citigroup.”

Questions on Oversight

Though they carry less prestige and are paid less than Wall Street traders and bankers, risk managers can wield significant clout. Their job is to monitor trading floors and inquire about how a bank’s money is being invested, so they can head off potential problems before blow-ups occur. Though risk managers and traders work side by side, they can have an uncomfortable coexistence because the monitors can put a brake on trading.

That is the way it works in theory. But at Citigroup, many say, it was a bit different.

David C. Bushnell was the senior risk officer who, with help from his staff, was supposed to keep an eye on the bank’s bond trading business and its multibillion-dollar portfolio of mortgage-backed securities. Those activities were part of what the bank called its fixed-income business, which Mr. Maheras supervised.

One of Mr. Maheras’s trusted deputies, Randolph H. Barker, helped oversee the huge build-up in mortgage-related securities at Citigroup. But Mr. Bushnell, Mr. Maheras and Mr. Barker were all old friends, having climbed the bank’s corporate ladder together.

Because Mr. Bushnell had to monitor traders working for Mr. Barker’s bond desk, their friendship raised eyebrows inside the company among those concerned about its controls.

After all, traders’ livelihoods depended on finding new ways to make money, sometimes using methods that might not be in the bank’s long-term interests. But insufficient boundaries were established in the bank’s fixed-income unit to limit potential conflicts of interest involving Mr. Bushnell and Mr. Barker, people inside the bank say.

Indeed, some at Citigroup say that if traders or bankers wanted to complete a potentially profitable deal, they could sometimes rely on Mr. Barker to convince Mr. Bushnell that it was a risk worth taking.

Risk management “has to be independent, and it wasn’t independent at Citigroup, at least when it came to fixed income,” said one former executive in Mr. Barker’s group who, like many other people interviewed for this article, insisted on anonymity because of pending litigation against the bank or to retain close ties to their colleagues. “We used to say that if we wanted to get a deal done, we needed to convince Randy first because he could get it through.”

Others say that Mr. Bushnell’s friendship with Mr. Maheras may have presented a similar blind spot.

“Because he has such trust and faith in these guys he has worked with for years, he didn’t ask the right questions,” a former senior Citigroup executive said, referring to Mr. Bushnell.”

According to a former Citigroup executive, Mr. Prince started putting pressure on Mr. Maheras and others to increase earnings in the bank’s trading operations, particularly in the creation of collateralized debt obligations, or C.D.O.’s — securities that packaged mortgages and other forms of debt into bundles for resale to investors.

Because C.D.O.’s included so many forms of bundled debt, gauging their risk was particularly tricky; some parts of the bundle could be sound, while others were vulnerable to default.

“Chuck Prince going down to the corporate investment bank in late 2002 was the start of that process,” a former Citigroup executive said of the bank’s big C.D.O. push. “Chuck was totally new to the job. He didn’t know a C.D.O. from a grocery list, so he looked for someone for advice and support. That person was Rubin. And Rubin had always been an advocate of being more aggressive in the capital markets arena. He would say, ‘You have to take more risk if you want to earn more.’ “

It appeared to be a good time for building up Citigroup’s C.D.O. business. As the housing market around the country took flight, the C.D.O. market also grew apace as more and more mortgages were pooled together into newfangled securities.

From 2003 to 2005, Citigroup more than tripled its issuing of C.D.O.’s, to more than $20 billion from $6.28 billion, and Mr. Maheras, Mr. Barker and others on the C.D.O. team helped transform Citigroup into one of the industry’s biggest players. Firms issuing the C.D.O.’s generated fees of 0.4 percent to 2.5 percent of the amount sold — meaning Citigroup made up to $500 million in fees from the business in 2005 alone.

Even as Citigroup’s C.D.O. stake was expanding, its top executives wanted more profits from that business. Yet they were not running a bank that was up to all the challenges it faced, including properly overseeing billions of dollars’ worth of exotic products, according to Citigroup insiders and regulators who later criticized the bank.
 

In 2005, as Citigroup began its effort to expand from within, Mr. Rubin peppered his colleagues with questions as they formulated the plan. According to current and former colleagues, he believed that Citigroup was falling behind rivals like Morgan Stanley and Goldman, and he pushed to bulk up the bank’s high-growth fixed-income trading, including the C.D.O. business.

Former colleagues said Mr. Rubin also encouraged Mr. Prince to broaden the bank’s appetite for risk, provided that it also upgraded oversight — though the Federal Reserve later would conclude that the bank’s oversight remained inadequate.

Once the strategy was outlined, Mr. Rubin helped Mr. Prince gain the board’s confidence that it would work.

After that, the bank moved even more aggressively into C.D.O.’s. It added to its trading operations and snagged crucial people from competitors. Bonuses doubled and tripled for C.D.O. traders. Mr. Barker drew pay totaling $15 million to $20 million a year, according to former colleagues, and Mr. Maheras became one of Citigroup’s most highly compensated employees, earning as much as $30 million at the peak — far more than top executives like Mr. Bushnell in the risk-management department.

In December 2005, with Citigroup diving into the C.D.O. business, Mr. Prince assured analysts that all was well at his bank.

“Anything based on human endeavor and certainly any business that involves risk-taking, you’re going to have problems from time to time,” he said. “We will run our business in a way where our credibility and our reputation as an institution with the public and with our regulators will be an asset of the company and not a liability.”

Yet as the bank’s C.D.O. machine accelerated, its risk controls fell further behind, according to former Citigroup traders, and risk managers lacked clear lines of reporting. At one point, for instance, risk managers in the fixed-income division reported to both Mr. Maheras and Mr. Bushnell — setting up a potential conflict because that gave Mr. Maheras influence over employees who were supposed to keep an eye on his traders.

C.D.O.’s were complex, and even experienced managers like Mr. Maheras and Mr. Barker underestimated the risks they posed, according to people with direct knowledge of Citigroup’s business. Because of that, they put blind faith in the passing grades that major credit-rating agencies bestowed on the debt.

While the sheer size of Citigroup’s C.D.O. position caused concern among some around the trading desk, most say they kept their concerns to themselves.

“I just think senior managers got addicted to the revenues and arrogant about the risks they were running,” said one person who worked in the C.D.O. group. “As long as you could grow revenues, you could keep your bonus growing.”

To make matters worse, Citigroup’s risk models never accounted for the possibility of a national housing downturn, this person said, and the prospect that millions of homeowners could default on their mortgages. Such a downturn did come, of course, with disastrous consequences for Citigroup and its rivals on Wall Street.

Even as the first shock waves of the subprime mortgage crisis hit Bear Stearns in June 2007, Citigroup’s top executives expressed few concerns about their bank’s exposure to mortgage-linked securities.

In fact, when examiners from the Securities and Exchange Commission began scrutinizing Citigroup’s subprime mortgage holdings after Bear Stearns’s problems surfaced, the bank told them that the probability of those mortgages defaulting was so tiny that they excluded them from their risk analysis, according to a person briefed on the discussion who would speak only without being named.

Meanwhile, regulators have criticized the banking industry as a whole for relying on outsiders — in particular the ratings agencies — to help them gauge the risk of their investments.

“There is really no excuse for institutions that specialize in credit risk assessment, like large commercial banks, to rely solely on credit ratings in assessing credit risk,” John C. Dugan, the head of the Office of the Comptroller of the Currency, the chief federal bank regulator, said in a speech earlier this year.

But he noted that what caused the largest problem for some banks was that they retained dangerously big positions in certain securities — like C.D.O.’s — rather than selling them off to other investors.

“What most differentiated the companies sustaining the biggest losses from the rest was their willingness to hold exceptionally large positions on their balance sheets which, in turn, led to exceptionally large losses,” he said.

In fact, some analysts say they believe that the $25 billion that the federal government invested in Citigroup this fall might not be enough to stabilize it.

Others say the fact that such huge amounts have yet to steady the bank is a reflection of the severe damage caused by Citigroup’s appetites.

“They pushed to get earnings, but in doing so, they took on more risk than they probably should have if they are going to be, in the end, a bank subject to regulatory controls,” said Roy Smith, a professor at the Stern School of Business at New York University. “Safe and soundness has to be no less important than growth and profits but that was subordinated by these guys.”

photo credit: TheTruthAbout…

I have written in previous posts about various proposals to stem the tide of mortgage foreclosures. Today’s New York Times Op-Ed piece Mortgage Justice Is Blind by John D. Geanakoplos and Susan P. Koniak is the latest entry.

They cover familiar territory, blaming subprime loans and securitization and quickly summarize the problem.

The current American economic crisis, which began with a housing collapse that had devastating consequences for our financial system, now threatens the global economy. But while we are rushing around trying to pick up all the other falling dominos, the housing crisis continues, and must be addressed.

We start with this simple fact: Too many families are being thrown out of their homes when it makes more sense to let them stay by “reworking” their mortgages — adjusting terms to make it possible for the homeowners to meet their responsibilities. In many cases, adjusting loans would help the homeowners and the lenders: the new mortgages would have lower monthly payments that homeowners could afford to pay, and would end up giving the lenders more money than the 50 cents on the dollar that many foreclosure sales are bringing these days.

To arrive at their solution, the authors first focus on the incentives of the “master servicer” which manages the pool of loans that are bundled together. In the old days when one banker lent money to one consumer each knew the other. If the borrower experienced financial difficulty, the lender had the ability and the incentive to renegotiate the mortgage.

With the advent of securitization, it is the “master servicer” who manages hundreds if not thousands of mortgages. They have very little incentive to rework the loans, fearing legal liability from investors. In addition, Geanakoplos and Koniak point out that the servicers will not be adequately compensated for the extra work.

As a result, “the master servicer now holds the power to rework the loans. And, as we have seen in the current crisis, these servicers aren’t doing that, as house after house goes into foreclosure.”
 
To solve this problem, we propose legislation that moves the reworking function from the paralyzed master servicers and transfers it to community-based, government-appointed trustees. These trustees would be given no information about which securities are derived from which mortgages, or how those securities would be affected by the reworking and foreclosure decisions they make.

Instead of worrying about which securities might be harmed, the blind trustees would consider, loan by loan, whether a reworking would bring in more money than a foreclosure. The government expense would be limited to paying for the trustees — no small amount of money, but much cheaper than first paying off the security holders by buying out the loans, which would then have to be reworked anyway. Our plan would also be far more efficient than having judges attempt this role. The trustees would be hired from the ranks of community bankers, and thus have the expertise the judiciary lacks.

Americans have repeatedly been told that the distressed loans cannot be reworked because these mortgages can no longer be “put back together.” But that is not true. Our plan does not require that the loans be reassembled from the securities in which they are now divided, nor does it require the buying up of any loans or securities. It does require the transfer of the servicers’ duty to rework loans to government trustees. It requires that restrictions in some servicing contracts, like those on how many loans can be reworked in each pool, be eliminated when the duty to rework is transferred to the trustees.

Under our plan, servicers would provide the homeowner’s name and other relevant information on each loan to a central government clearing house, which would in turn give trustees the data on homes in their local area. Once the trustees have examined the loans — leaving some unchanged, reworking others and recommending foreclosure on the rest — they would pass those decisions to the government clearing house for transmittal back to the appropriate servicers.

The servicers would then do exactly the same work they do now, passing on the payments they collect from the reworked mortgages to the securities’ owners in each pool. The servicers would also foreclose on those properties the trustees had decided did not qualify for reworking. For performing those tasks, the servicers would continue to receive the fees due under their existing contracts.

We need an innovative approach to overcome the gridlock that plagues our housing markets. Otherwise, we imperil millions of homeowners and — through the alchemy of derivatives — the American and global economy.

I think their solution to the problems of falling home prices, abandonment and foreclosure is very interesting. It adds to previous suggestions.

News reports have indicated that the Bush Administration will unveil their plan shortly. We’ll see what aspects of the various proposals they will recommend.

photo credit: TheTruthAbout…

Shouldn’t We Rescue Housing?, Joe Nocera’s column in Saturday’s New York Times, focuses on the problem of house foreclosures and what must be done to stop a downward spiral.

So far, under the Rescue Plan, the Federal Reserve has added a tremendous amount of liquidity to the banking system. In addition, “the Treasury Department just pumped $125 billion into the country’s largest financial institutions, and it promises to use another $125 billion — more, if necessary — to recapitalize regional and community banks.”

They are vital steps. This week, at long last, the credit markets thawed, at least a little, and the global recapitalization of the banking system is the reason.

But the job isn’t done yet. The government now needs to tackle what R. Glenn Hubbard, the former chairman of the Council of Economic Advisers under President Bush, calls “the elephant in the room”: the continuing decline of housing prices.

I’ve seen estimates suggesting as many as one out of every six homeowners has a troubled mortgage. This is an enormous social problem. It is also a continuing economic problem. In the year since the crisis began, the world’s financial institutions have written down around $500 billion worth of mortgage-backed securities. Unless something is done to stem the rapid decline of housing values, these institutions are likely to write down an additional $1 trillion to $1.5 trillion. In other words, we ain’t seen nothin’ yet.

If housing prices keep falling, many millions of additional homeowners will find themselves, through no fault of their own, with underwater mortgages. Besides, foreclosures damage property values for everyone, not just those losing their homes.

Nocera mentions Sheila Bair, chair of the Federal Deposit Insurance Commission, and her efforts to do more for homeowners; the Hubbard and Mayer plan to allow all residential mortgages on primary residences to be refinanced into 30-year fixed-rate mortgages at 5.25 percent; and Yale economist John D. Geanakoplos’ recommendations to “modify mortgage loans to keep homeowners in their homes.” Nocera is sent many plans to solve the foreclosure problem.  Here is one he really likes.

But recently a proposal came across my desk that I believe is so smart, and so sensible, that I hope our nation’s policy makers will give it a serious look. It comes from Daniel Alpert, a founding partner of Westwood Capital, a small investment bank. I have quoted Mr. Alpert frequently in recent columns, because he has been both thoughtful and prescient on the subject of the financial crisis.

Here’s his idea: Pass a law that encourages homeowners with impaired mortgages to forfeit the deed to their lenders but allows them to stay in the homes for five years, paying prevailing market rent. Under the law Mr. Alpert envisions, the lender would be forced to accept the deed, and the rent. After five years, the homeowner-turned-renter would have the right to buy the home back, at fair market value, from the lender.

There are so many things I like about this idea that I hardly know where to begin. Let’s start with the fact that it doesn’t require a large infusion of taxpayers’ money. Indeed, it doesn’t require any government money at all. It also doesn’t let either homeowners or lenders off the hook, as many other plans would. The homeowner loses the deed to his home, which will be painful. The lending institution, in accepting prevailing market rent, will get maybe 60 or 70 percent of what it would have gotten from a healthy mortgage-payer. (Rents are considerably lower than mortgage payments right now.) That will be painful too. Moral hazard will not be an issue.

Nocera’s blog, has a link to Mr. Alpert’s detailed description of how his plan would work.

photo credit: Casey Serin

“We cannot assume that even if the economic news gets worse that prices will decline further. It’s quite possible that prices are already reflecting investor concerns of more trouble ahead and may rise despite more gloomy business reports in days and months to come.” – Weston J. Wellington.
 
Today’s New York Times has two editorials, both of them well worth reading; one was written by Nobel prize-winning economist Paul Krugman and the other by Warren Buffett, the chairman and chief executive officer of Berkshire Hathaway, who is touted as one of history’s most successful investors. At first glance, their respective opinions seem to be diametrically opposed, but that is only true if you don’t understand how the stock market works.

In Let’s Get Fiscal, Krugman assesses the outlook for the economy saying that there is “grim news coming in about the real economy.” Summing up the economic situation, he states,

Just this week, we learned that retail sales have fallen off a cliff, and so has industrial production. Unemployment claims are at steep-recession levels, and the Philadelphia Fed’s manufacturing index is falling at the fastest pace in almost 20 years. All signs point to an economic slump that will be nasty, brutish — and long.

Krugman predicts that the unemployment rate, which is already above 6 percent, “will go above 7 percent, and quite possibly above 8 percent, making this the worst recession in a quarter-century.”

“And how long will it last? It could be very long indeed.”

Upon reading that, it would be understandable if you decide to sell all of your stocks and put the money from the proceeds “under the mattress,” so to speak. If you’re at all in agreement with Krugman’s analysis, you might want to buy “safe” CDs or, if you are totally freaked out, short-term U.S. Treasury securities, that are paying very close to zero interest.

That understandable inclination of reacting to bad current news, and worse predictions of the future, though perfectly natural, would likely also be entirely wrong. The reason is that the stock market looks forward. What is already known is “priced in the market.” Stock prices have already fallen in anticipation of a worsening economy. If and when the economy declines further, that will only confirm what we think we know now, so stock prices may not decline any more from where they currently stand.

In other words, as an investor, you cannot read the news or even someone’s prediction on where the economy is going and “profitably” act on it. In the stock market, “what everyone knows is not worth knowing.”

Please note, that nowhere does Krugman give any advice on what to do as an investor. That’s not his area of expertise. I am only projecting what a knowledgeable layman might conclude from reading Krugman’s observations.

That brings me to Warren Buffett’s opinion piece. It is an understatement to say that Buffett is a very, very, successful long-term investor. He’s been called, among other things, the Oracle of Omaha and the world’s greatest stock market investor, and an empire builder. His favorite holding period is “forever.” He certainly does not try to time the market, as he believes no one can do that successfully. (There is a lot of academic evidence that people who do try to time the market end up with terrible results.)

In Buffett’s Buy American. I Am, he agrees with Krugman’s basic thesis on the economy.

The financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

But here is the seeming paradox. What is Buffett doing?

I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.

Why?

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors.

Since no one can forecast the short term direction of the stock market, Buffet continues:

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

This is typical Buffett — folksy, but right on. He then writes about the Great Depression and World War II, and notes that buying when things look bleakest was the right strategy. He concludes that “bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.”

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later.

This is my fourth post in the series called Is It Different This Time?  Feel free to read the others, especially if you are ready to hit the panic button and sell your stocks and/or stock mutual funds.

photo credit: notsogoodphotography

“It’s the borrowers defaulting. That is what’s causing the distress at the institution level. So why not tackle the borrower problem?” – Sheila Bair

Damian Paletta has written a series of excellent articles in The Wall Street Journal on the beyond-the-scenes negotiations of the government’s $700 billion bailout/rescue plan. His October 16, 2008 article FDIC Chief Raps Rescue for Helping Banks Over Homeowners is another argument strongly in favor of addressing the more immediate problems of declining property values, defaulting mortgage loans and subsequent foreclosures, which are at the very core of the financial crisis.

Federal Deposit Insurance Corp. Chairman Sheila Bair on Wednesday criticized the federal government for failing to take more aggressive steps to prevent Americans from losing their homes, highlighting a rift between her and other senior U.S. officials over terms of the $700 billion rescue package.

The government plan will help stabilize financial markets but it doesn’t do enough to address home foreclosures, the root of the crisis, she said in an interview with The Wall Street Journal.

“Why there’s been such a political focus on making sure we’re not unduly helping borrowers but then we’re providing all this massive assistance at the institutional level, I don’t understand it,” she said. “It’s been a frustration for me.”

Ms. Bair’s comments are expected to provide new fodder for critics of the government’s response to the financial crisis, especially among those who say it has done too little to help families falling behind in their mortgage payments.

“I support all the measures; I’ve been a part of all the measures that have been taken,” she said. “But we’re attacking it at the institution level as opposed to the borrower level, and it’s the borrowers defaulting. That is what’s causing the distress at the institution level. So why not tackle the borrower problem?”

The agency’s growing role has given her views a more prominent platform after spending much of this year arguing her point from the sidelines.

Ms. Bair, a one-time Republican congressional candidate and children’s book author, had suggested direct action to modify mortgages en masse before many other regulators in Washington. In April, she pitched a plan that would authorize the Treasury Department to make loans to as many as one million homeowners to minimize foreclosures. In July, after failed thrift IndyMac Bancorp Inc. reopened its doors under FDIC control, the agency said it would halt foreclosures on the mortgages it owned and would try to modify loans for struggling homeowners.  

Ms. Bair is scheduled to be on The Charlie Rose TV program this evening.

An October 5th Washington Post editorial entitled Bad Medicine by James Grant, the editor of Grant’s Interest Rate Observer, criticizes the Government’s bailout plan. He blames our current problems on the bursting of the housing bubble exacerbated by the Federal Reserve’s low interest policy.

Grant’s main points are:

• The bubble was brought on by too low interest rates and too much optimism.
• Wall Street investment banks were quick to cash in on the boom, but were slow to recognize the turn in the market and the attendant losses in their portfolios.
• The answer is to let prices reflect their market values, not to mask those reduced values by artificial government intervention.

Low interest rates, easy money and malleable accounting rules are what plunged Wall Street into crisis. Yet it is low interest rates, easy money and malleable accounting rules that top the list of federal fixes.

The unblinkable fact is that Americans own too much house. We overpaid and overborrowed, and many of us are “upside down,” as the car dealers say. What to do? Recognize the losses and write them off. What not to do? Inflate the currency and debase accounting standards.

But inflation and debasement are the very policies being put in place. The Federal Reserve, not waiting for Congress, embarked last month on a radical program of money-printing. Reserve Bank credit — the raw material of bank lending — is growing at the year-over-year rate of 61 percent.

After the stock market broke in 2000, then-Fed Chairman Alan Greenspan set about easing policy. In company with Fed Governor Ben S. Bernanke, the man who wound up succeeding him, Greenspan warned against “deflation.”

So it pushed the “federal funds rate” — the interest rate that the Fed directly controls — to 1 percent in mid-2003 and kept it there for a full 12 months.

American consumers pinched themselves. Could they really borrow more than 100 percent of the price of a house at an unimaginably low teaser rate without so much as presenting proof of employment? Indeed, they could. House prices went up and up.

When, in 2006, the roof began to fall in, Wall Street was in a quandary. It held outsize volumes of triple-A-rated mortgage-backed securities (MBSs). That they were not, in fact, triple-A, had become painfully obvious.

Prices can be unwelcome pieces of information. When an especially unwelcome batch wells up after a financial collapse, governments try to quash it. So it is today. The SEC has suppressed short selling. The bailout bill will open the door to the suspension of market-value accounting. The Fed is moving heaven and earth to cheapen the value of the dollar.

Long after the crisis burst into the open, the Fed and Treasury downplayed it. It was, they insisted, “contained.” Last week they asserted that, unless the House voted “yea,” the wheels would come off this $14 trillion economy. President Bush himself has broadly hinted that the nation is on the cusp of disaster.

How can they be so sure? And how can they know that the unintended consequences of the radical policies they are pushing through won’t be worse than the panic that they themselves are helping to foment? When the Fed insists it has no choice but to print up hundreds of billions of new dollars and when the keepers of accounting standards bend in the face of criticism that market prices hurt, what they are really saying is the that financial truth is too awful to bear. Heaven help us all if they’re right.

photo credit: Matti Mattila

Alex Berenson’s October 11th article in The New York Times Those With a Sense of History May Find It’s Time to Invest is well worth reading, especially if you are discouraged enough to be considering selling your equity mutual funds and putting the money in CDs.

The four most dangerous words for investors are: This time is different.

In 1999, technology companies with no earnings or sales were valued at billions of dollars. But this time was different, investors told themselves. The Internet could not be missed at any price.

They were wrong. In 2000 and 2001 technology stocks plunged, erasing trillions of dollars in wealth.

Now investors have again convinced themselves that this time is different, that the credit crisis will push economies worldwide into the deepest recession since the Depression. Fear runs even deeper today than greed did a decade ago.

But in their panic, investors are ignoring 60 years of history. Since the Depression, governments have become far more aggressive about intervening when credit markets seize up or economies struggle. And those interventions have generally succeeded. The recessions since World War II, while hardly easy, have been far less painful than the Depression.

Berenson goes on to quote various investors and economists who believe that the pessimism is overdone and that this is a good time to buy rather than sell stocks.

If there is good and wise policy, and government moves effectively, this need not play itself out in ways like the Great Depression, which is the image that is playing itself out in people’s mind. . Government action typically does not work immediately, and banking crises around the world often require multiple interventions. – Stephen Haber, an economic historian and senior fellow at the Hoover Institution.

“I think in years to come — I wouldn’t say months to come — we will perceive this as being a great value-buying opportunity. Two and three years from now, it will seem very smart.” - David P. Stowell, a finance professor at Northwestern and a former managing director at JPMorgan Chase.

“This is the opportunity of a lifetime. The most important securities are being given away.” – Martin J. Whitman, a professional investor for more than 50 years.

photo credit: Sheffield Tiger