Reflections on the Week of ‘Almost Armageddon’

Paul Solman: Now that so many of our favorite economists have spiritedly weighed in here on the Business Desk on the first anniversary of “Almost Armageddon Day,” I thought I’d comment on theirs. First Simon Johnson.

Simon says his greatest surprise of the year is the nabobs-of-negative-equity no-shows at Obama’s NY speech: not one there-but-for-the-grace-of-government CEO showing enough gratitude, or just respect, to attend. Hey, maybe they were given the text in advance. I sure wouldn’t want all eyes on me and my the NewsHour economic team if POTUS was going to blame us for the world crisis. (Come to think of it, though, we weren’t. Plus, he didn’t have to bail us out.)

One prominent economist I ran into this week expressed his own surprise at Simon — for continuing to be so consistently tough on Wall Street. A finance professor wrote recently that The Baseline Scenario, Simon’s blog, was becoming shrill. But a commoner who reads this page told me yesterday how much she liked Professor Johnson’s sturdy spine. And having had up-close-and-personal dealings with some of the New York nabobs over the decades, I can see Simon’s point.

Yet I’d like to add this counterpoint from the dazzling MIT economist Roberto Rigobon, who is slated to make in appearance in a story of ours this weekon the G20 meeting and whose web page not only features an account of the crisis well worth reading, but Venezuelan rock songs he recorded with his kids; click on Policy Papers at the top, and then the paper on the US Crisis, which was actually a speech; click Music, upper right, for the entertainment).

Here’s a defense of Wall Street – sort of — from an interview with Rigobon last week:

Roberto Rigobon: The nature of what we’re doing in the financial sector is by construction a risky activity. We take resources that are very short run. There are depositors that feel that their resources are safe, and we lend very risky investments — all of them. We build new highways, and you know every single aspect of investment is way riskier than the depositors. This activity is unfortunately risky and therefore it has been going bankrupt in the past and will continue to be going bankrupt in the future.

Paul Solman: But we don’t move forward… But we don’t move forward as a world economy, we don’t get richer unless we take those risks?

RR: Yes. Absolutely. Absolutely. And the most developed nations are the ones that have the best banking sectors, the best financial sectors and unfortunately in those the risks are much bigger. If you go and open a savings account in a bank in, I don’t know, in a small country in Latin America, well probably the risk of failure is small because the bank does very little. They borrow from depositors and they lend to the government. No risk whatsoever.

When actually the bank starts doing their job which is financing a project and investing in a new company, in a new idea that you have, well that’s risky! Unfortunately that’s risky! Some of them will profit and will actually improve the standards of living, some of them will not and sometimes those risks don’t pay off.