who cares what christine lagarde thinks about interest rates?

Another week has brought yet another much-publicized call for the Federal Reserve to delay raising interest rates. Yesterday, the International Monetary Fund opined that the Fed should hold off on a rate hike until 2016.

Give me a break.

First off, why should anyone care what the IMF thinks about the American economy? That organization’s track record is questionable, at best, and its current head Christine Lagarde has never met a government intervention she didn’t love. As France’s finance minister, she reportedly urged then-Treasury Secretary Henry Paulson to prop up Lehman Brothers during the financial crisis. In other words, she opposed one of the few things Paulson got right in those dark days: letting Lehman go under.

I was in the room for former Lehman CEO Dick Fuld’s already infamous speech last week in New York. Believe me, seeing it live, it wasn’t as bad as the press made it out to be. It was far, far worse. Fuld rambled incoherently about the 27,000 “risk managers” the firm employed, and how great the culture was there. His lack of reflection or even a shred of shame was stunning. This is the guy and the type of behavior Lagarde wanted to reward with taxpayer money.

Lagarde’s belief that bailing out Fuld and his colleagues on Wall Street was in America’s (and the world’s) best interest is unsubstantiated at best, idiotic at worst. Investment banks, unlike commercial banks, are essentially massive hedge funds. Nobody would argue our government should bail out a failing hedge fund, however large. The financial crisis occurred because those investment banks collectively made what could easily be called the worst decision in the history of American capitalism. They levered up their balance sheets and used that borrowed money to purchase giant pools of suspect home mortgages. When defaults and/or ratings downgrades on those pools increased, massive losses and write downs ensued—and because the banks had leverage ratios above 20 to 1, they quickly became insolvent. Like countless businesses before them, they screwed up and went broke.

As we all know, though, they didn’t suffer the same fate as normal corporations that make catastrophically bad business choices. The Ivy League-educated troika of Paulson (a former Goldman Sachs CEO), NY Fed chief Timothy Geithner, and Fed Chair Ben Bernanke was quick to lend gobs of taxpayer money to keep them (minus Lehman) in business. Paulson, et all also threw huge sums at AIG, which arguably made an even dumber business decision than its banking clients—insuring those pools of suspect mortgages with credit default swaps. Today the three former policymakers are all writing books and taking bows for “saving” our economy through these extraordinary measures. Please. Worse still, the dominant narrative pushed by leaders like Lagarde (not to mention the entire mainstream financial media) is that the Wall Street bailouts didn’t go far enough. According to this conventional wisdom, if only we’d bailed out Lehman Brothers, too, things would somehow be better off than they are today.

Since the crisis, politicians have been debating the best way to regulate Wall Street to prevent a future meltdown. I’ve always maintained that the best regulation of all is the American bankruptcy code. We will never know how our economy would have fared if the remaining banks had followed Lehman into oblivion, either through orderly bankruptcies or forced sales to larger, better capitalized companies. We do know that investors in the bonds of those companies were rewarded mightily for betting on government intervention. That was crony capitalism at its worst, and the one percent walked away with the spoils while the next generation was saddled with more debt, job losses, and—despite seven years (and counting) of zeroed-out interest rates–the slowest post-recession recovery in American history.

Tell me again why we should care what Ms. Lagarde thinks now?

[note: this post originally appeared on my Yahoo! Finance contributor page.]


One thought on “who cares what christine lagarde thinks about interest rates?

  1. wisdom8020

    Thank you for the post. Sadly, there has not been much consequences for the reckless behaviors.

    One way to make banks more accountable is to have the bank executives and directors liable for the losses (Brazil does this already). This will surely decrease risky behavior.

    Reply

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