But if they did that, it would undermine the claim that no one saw any of this coming and it just fell on us, out of the blue, like a grand piano from the Market Gods.

Heaven forbid that lay persons be told that this was the result of recognizably bad policy pursued with blind, greedy incompetence, over the objections of more prudent minds.

No doubt that housing bubble contributed a large part to the BK of a 158-yr old firm. But it's not just the bubble, but their risk-taking had increased to unprecendented level coupled with putting all eggs in one basket.

Risk diversification (I know there was CDO to offset somewhat) was never in their mind.

The risk taking in banking has been incredible; people with PHd always scoffed about their risk-taking but said they have built very sophisticated models.

And now, people are surprised.

I agree with both John and James, but referring to Leham Brothers as a 158-year-old firm is like referring to Karl Rove and Tom DeLay as members of the "party of Lincoln." It should also be noted that David Wessell said that if the Fed fails to bail out Lehman and there is negative economic fallout, it would be the GOVERNMENT's biggest blunder in history. So much for the "free market" and moral hazard.

if the Fed fails to bail out Lehman and there is negative economic fallout, it would be the GOVERNMENT's biggest blunder in history

I think it's too late for that as they already setup Fannie and Freddie for a fall, then bailed them out (and from all appearances have yet to make significant changes to the practices that led to their downfall). Any subsequent bailouts are peanuts.

McCain has plans for your Social Security money. He wants to invest it with Merrill Lynch or with Lehman Brothers, but he can't seem to find them right now. If you run into those guys, will you have them get in touch with him?

"McCain has plans for your Social Security money. He wants to invest it with Merrill Lynch or with Lehman Brothers, but he can't seem to find them right now. If you run into those guys, will you have them get in touch with him?"

As opposed to those politicians who "wisely" believe that SS money should prudently be entrusted to the U.S. government, which, as everyone knows, is far more trustworthy and credible than the private sector. (/sarcasm}

Jeff wrote,

As opposed to those politicians who "wisely" believe that SS money should prudently be entrusted to the U.S. government, which, as everyone knows, is far more trustworthy and credible than the private sector.

I do think Treasuries are a bit less opaque than the crazy instruments Wall Street was investing in.

James wrote

The risk taking in banking has been incredible; people with PHd always scoffed about their risk-taking but said they have built very sophisticated models.

That's what happens when you build theoretical castles in the air and don't look at the data. ("Data," in this case, being the true credit risk of the underlying mortgages, and the true systemic risk of things being much more correlated than the models assumed.)

IOW, garbage in, garbage out.

You know Jeff, the government has had control of SS money since it was put in place, and they have successfully provided that SS money back to the citizens throughout the 60+ years since then. So yes, in fact, the government is a prudent institution to handle people's safety nets(beyond the fact that it is the only institution out there capable of organizing such a system in a way that doesn't fleece those who buy in); they've been handling it prudently for decades and that is what we call a proven track record. You don't get to ignore that just because it offends against your chosen economic orthodoxy.

You anti-gov zealots need to get it through your heads that not all regulation is bad, nor are all government programs vile wastes of the taxpayers' money.

Jeff, I think the compelling government interest in always having the market go up is bad enough as it is (401ks, IRAs, etc). As much as my libertarian heart likes the "let ME invest it, damn it!" idea, my formerly-libertarian brain knows that mandated stock market investments are not in the best interests of a free-functioning equity market.

Why that's not screamingly obvious to more of those who spend their days ranting about "freedom" is hard for me to understand.

Julian,

I am hardly an anti-government zealot. I find it amusing that you presume that I am, based on my previously meager post. However, what I am is just a wee bit skeptical of ideologues on both the left and right who advocate an either-or solution.

And I'm sorry, but I flat out deny your claims that the federal govt. has prudently handled SS. Call me crazy, but I believe that we have all sorts of unfunded and/or underfunded long-term liabilities, not the least of which is the SS Ponzi scheme.

I never suggested that ALL or ANY regulation is bad, nor that ALL or ANY government programs are a waste. So, before you lash out at others, you may wish to inquire as to their true beliefs.

Jeff,

Has SS ever failed up to the present Has the private sector failed during the same time?

Define failure generally. And is the concept of "failure" similarly applicable to both the public and private sectors? I'm not sure I could answer that question easily myself.

I'm pressed for time at the moment, but I'll try to provide a more substantive response to you, Kenneth.

To respond briefly, Kenneth, I believe that your question is somewhat fallacious, since it presumes that one is conceiving of comparable entities, which is just not the case. (Again, I think that the notion of failure generally should be specified.)

You're asking for an instance of "failure" (whatever that is supposed to mean in this context) that applies, on the one hand, to one governmental entity, viz. SS. And on the other hand, you're asking for one instance of private sector "failure." (I'm paraphrasing you, of course; so I hope that I did justice to what you had in mind.) To me, this is a VERY loaded question. It might be equally fallacious to ask for public/private sector "success." What would one mean by "success"?

Here's a link to the Social Security Adminstration's Trustees 2008 report: http://www.ssa.gov/OACT/TR/TR08/II_project.html#105057. It mentions unfunded long-term obligations. That should concern all of us, since, as taxpayers, we all have a vested interest in this compulsory program.

I fail to see how anyone who has been paying even minimal attention to the nation's economy during the past several years could be surprised at what's happening. The surprising thing would have been if it hadn't happened

Jeff is stalling and hoping he can remain standing until the end of the round.

Somebody usually turns up on this blog like Jeff who has no clue about Social Security, but the more knowledgeable should not get diverted into an irrelevant discussion of SS funds as investment. The Trust Fund is only a temporary correction for the baby boom and when it is gone SS will be back to the way it was designed - a simple transfer of income from working people to retired and disabled.

The Trust Fund itself will be quite secure unless Congress is talked into changing the law so that the debt to it is dishonored, or so that the money is handled by the likes of Lehman and M-L.

The press ALWAYS works this way. For example, suppose the local violent guy and severe nutcase kills a few people. The press goes and interviews a few neighbors. Just about every says, in effect, it was just a matter of time before this nut case killed a bunch of people. The press is persistent. They keep hunting. Eventually they find one neighbor, maybe a block or two a way, who can be quoted: "Who would have expected such a nice sweet boy blah blah blah?" There is always someone who doesn't have a clue. It's almost hilarious, but I don't think any self respecting editor will even let a reporter file a story without a "who would have expected" quote.

One possible exception is solar eclipse stories, though this is not for lack of trying.

Well, it doesn't surprise me as up until a few months ago most people they interviewed were in the "subprime is contained" camp.

What really jerked my chain about Wessel this AM was the way he described BofA's purchase of MER as a "firesale" and likely a great deal... Well after watching the CEOs' press conference today it's obvious that there was no way the proper due diligence was done (they supposedly only brought it up Sat AM) and IT WAS LIKELY BofA purchased the counterparty risk they had with MER so BofA could deep six the bad assets and not have to deal with a mark to market.

This should have been the story: the obfuscation continues and we aren't getting to the bottom of the true value of the assets b/c the entire financial system is built on cooked books, ala Enron and Worldcom and the press has been whistling past the grave yard AGAIN and talking up real estate when they should have been investigating and whistle blowing.

Jeff wrote, I never suggested that ALL or ANY regulation is bad, nor that ALL or ANY government programs are a waste. So, before you lash out at others, you may wish to inquire as to their true beliefs.

So why are you focusing on SS?

Why not the military budget? Viz, why is a country with as much economic power as the US, and no unfriendly countries on its borders, spending $700 B a year (IIRC)---more than the rest of the world combined---on its military?

Or what about Iraq? That's cost perhaps $1 trillion (IIRC---sorry, it's early am here). And unfunded liabilities---do you know how much it costs the government to support gravely wounded soldiers for the rest of their lives?

I believe that Jeff is flat on the canvas. Nice stall, though.