Will the Sky Fall?

This past weekend Book TV devoted a slot to a book about the Panic of 1907. Since they tend to set their schedules at the beginning of the week, they could not have anticipated that viewers would be thinking about Treasury Secretary Hank Paulson's bailout proposal during the broadcast, but the timing could not have been better. I turned to Wikipedia for a reasonably succinct summary of the basic story:

The crisis was ignited by an attempt to corner the market in a copper company that had collapsed that October. When the bid failed, banks that had loaned money for the scheme experienced a number of runs which eventually spread to affiliated banks and trusts, leading a week later to the downfall of the Knickerbocker Trust Company, New York's third largest trust company. From Knickerbocker, fear spread throughout the city's trusts and across the country as regional banks pulled deposits from New York, and as nationwide people withdrew deposits from their regional banks.

At the time the United States had no central bank to inject liquidity. The panic may have been worse if not for the intervention of J.P. Morgan, who convinced other bankers in the city to provide a backstop for the crisis. By November the contagion had stopped, and the following year, Senator Nelson W. Aldrich established and chaired a commission to investigate the crisis and propose future solutions, leading to the creation of the Federal Reserve System.

Speaking of the Federal Reserve, there has been an energetic debate over at Truthdig stimulated significantly by Ben Bernanke's testimony yesterday before the Senate Banking Committee. I was reminded of the Panic of 1907 when I read the following brief contribution from reader "troublesum:"

Congress should call their bluff and see if the sky falls in the next few days.

This morning I heard on the radio that House Speaker Nancy Pelosi has declared that she is not going to rush into things unless there is solid support for the $700 billion "solution" on the Republican side, knowing full well that those Republicans (all of whose seats are up for grabs in November, most of which will be decided by Main Street, rather than Wall Street) have yet to give any signs of such "solid support." Meanwhile, in the Senate Banking Committee hearing room the skepticism was so thick you could cut it with a knife; and it was being voiced with equal passion by both Committee Chair Christopher Dodd and his Republican counterpart, Richard Shelby (admittedly for different reasons).

So, is the sky going to fall? It seems that one of the most important lessons of the Panic of 1907 is that it was resolved without any Government intervention, for the simple reason that, at that time, the Government did not have any institution that could intervene! The intervention came from J. P. Morgan, who may well have been the fattest of the fat cats at that time, and his combined powers of strategic planning and aggressive persuasion to engage the resources of other fat cats. Like it or not, the system took care of itself!

Can this system take care of itself? One place to start might be with a morning dispatch from Reuters:

U.S. stocks headed for a higher open on Wednesday after Warren Buffett made a $5 billion investment in Goldman Sachs Group Inc late on Tuesday, buoying sentiment in the beleaguered financial sector.

Additionally, Japan's No. 3 bank, Sumitomo Mitsui Financial Group, plans to invest in Goldman Sachs, Japanese media said, in what would be the third big Japanese investment this week on Wall Street.

Before the bell, shares of Goldman Sachs jumped nearly 5 percent to $130.85, while rival Morgan Stanley rose 4.6 percent to $29.30. JPMorgan Chase, the No. 3 U.S. bank, were up 2.3 percent at $41.48.

A rise on Wall Street would help reverse the worst two-day slide in six years.

Who has (as the risk of making Barack Obama's supporters cringe) "power you can believe in," Warren Buffett or any representative of the Bush Administration? Now, to be fair, this same Reuters report does not write off the significance of the current turmoil in our Congress:

But even as the Goldman Sachs news suggested confidence, investors worried congressional wrangling could delay or weaken the proposed $700 billion plan to rescue the financial sector, increasing unease about the struggling U.S. economy.

Nevertheless, Buffett's action is but one of several signs of "movement from within" (most of which have originated in Europe or Asia) to address the problem with resources already available. Additional resources would probably help, but who would know best what to do with them? If Congress is "wrangling" over their confidence in Hank Paulson, perhaps they should consider bringing other people to the table in whom both they and Wall Street have the necessary confidence.

Since this is not 1907, we have to be careful just how far we can reason with this particular analogy. On the other hand, rather than a government that took a detached laissez-faire position, we have one that is not beyond causing the sky to fall by deliberately undermining some of its props! (Think of Naomi Klein's "shock doctrine" thesis.) We are so far from being out of the woods that we barely know the extent of the woods! Nevertheless, we are beginning to identify a few cool heads trying to take corrective actions with the resources they have. Will any of them be testifying before the Senate Banking Committee or the House Financial Services Committee?