Anna Schwartz interview

In an interview with the Wall Street Journal (Oct 18, 2008), economist Anna Schwartz warned that the Fed's response to the current financial crisis in inappropriate. She commented that the Fed is acting like the problem is about a lack of money to lend (which is what led to the Depression). The real problem, she says is "the lack of faith in the ability of borrowers to repay their debts."

The Fed keeps throwing money at the issue and meanwhile, the "banks don't know who is still solvent and who is not."

Secretary Paulson's move away from buying bank assets and toward directly recapitalizing them, means a shift from "trying to save the banking system to trying to save the banks." Rather than keeping badly managed and capitalized banks afloat, they should be allowed to fail so that healthy banks can prosper.

Letting Lehman Brothers fail was the right thing to do, but by then the government had saved so many others, "the markets didn't know how to react. Instead of looking principled, the authorities looked erratic and inconstant."

Hong Kong bankers appear to agree with Ms. Schwartz. The Wall Street Journal reported (Oct 18, 2008) that they will buy the Lehman Brother derivatives (known in Hong Kong as minibonds). The public is angry about the move and the bankers are using independent auditors to determine the market value of the minibonds.

But the minibonds are assets, no matter how bad they are, they are still assets. This should allow the strong banks in Hong Kong to move forward even if the weak ones won't.