A catastrophic failure of imagination

Joseph Lawler makes a critical point about the October 2008 crash and Henry Paulson's handling of it:

Why did Treasury and the Fed allow Lehman Bros. to collapse after they'd bailed out Fannie and Freddie and facilitated the sale of Bear Stearns?


Paulson does not say. The line at the time was that Treasury had no legal authority to intervene, but that was the extent of the information officials gave out. Paulson tells a long story (which has its own problems) about his efforts to coax different banks into buying Lehman, and then concludes with this: "Some in the group asked if we should revisit the idea of putting public money into Lehman, but Tim said there was no authority to do that."


Again, note the reduction of an impossibly complicated issue -- whether regulators had the legal authority to bail out Lehman -- into a impromptu conversation with a first-name-basis friend.

This is one example of a recurrent theme in the financial crisis: a handful of men (in Washington and New York) grappling with the crisis on an ad hoc basis. As Lawler puts it:

huge decisions determining the fates of endlessly complex institutions are gamed out in the crudest of terms by two pals in conversations depicted with a level of detail, dramatic tension, and moral awareness that would be better suited for a Sesame Street segment about cooperation.

The common rationalization is that the mortgage and derivative meltdown was a "black swan event" that surprised the key players and caught them unprepared.

This excuse calls to mind the 9/11 Commission's words:

Across the government, there were failures of imagination, policy, capabilities, and management.

The most important failure was one of imagination.

Maybe Wall Street and the Treasury accept the frenzied search for ad hoc stop gaps as the best way to hand a crisis. Not every organization shares this tolerance for hyperkinetic amateurism.

The military has a well stocked toolbox that they use to anticipate the unexpected and to build resilience for when anticipation fails. As Colin Gray put it:

General Dwight D. Eisenhower once observed, the principal value of military planning is not to produce ahead of time the perfect plan, but rather to train planners who can adjust and adapt to changing circumstances as they emerge.

I hope some one at Treasury is gaming out some of the doomsday scenarios that stalk our nightmares. I said hope, because i've not seen any reports of such proactive preparations.