Deadwood

Let's clear out the deadwood. Megan McArdle tut-tuts Obama's budget director, who is going to marry for the second time and just had a baby with a past girlfriend. "Goodness," she says. " I never realized that Peter Orszag's personal life was so complicated."

We have always quite deliberately averted our eyes from the closeness of McArdle's little set of nascent bloggers and future tea-baggers. Some things just can't be unlearned, no matter how much you want them forgotten. McArdle should be aware that such cocktail party chatter is inappropriate in The Atlantic, but I guess Washington gossip is more amusing than economics and the subject in question works for the Democratic administration. Sally Quinn would be proud.

There's also a post about chocolate--she can only eat quality chocolate. Quelle surprise.

During the Depression, The Atlantic published an article by Bernhard Ostrolenk on the causes of the stock market crash. There is a retrospective of long-ago topics in the online magazine, and the authors say:

Investment banking had undergone significant changes as well during that same period. [During the restructuring of the banking system from independent banks to chain banking.] In the January 1930 Atlantic, Edgar Lawrence Smith described how Wall Street’s lending practices had come to violate the basic principles of sound banking. In a well-conducted bank, he wrote,

When a man wishes to borrow…his credit is appraised and a loan is made proportionate to his credit standing. Banks rarely, if ever, make loans to people with whose affairs they are not reasonably familiar.

But during the high-flying ’20s, when a customer borrowed from a stockbroker to invest in the market, Smith observed, such caution was abandoned. Eager to cash in, individuals assumed large amounts of debt in order to purchase stock they should not have been able to afford. And stockbrokers, in pursuit of commissions and with an eye towards driving prices ever higher, readily extended these unwise loans, which were referred to as “debit balances.”

Debit balances thus underwrote a financial system that was unsustainable. For Smith, the collapse of the stock market could be traced back to abuses of the simple principle of credit. Solid credit, he explained, is based either “(1) upon the competence, character, and earning power of the borrower, or (2) upon documents representing genuinely self-liquidating transactions.”

In the case of debit balances, however, stockbrokers extended credit on neither ground. Instead, the ability of the borrowers to pay back the loan depended on “the general level of stock prices.” But those prices, Smith pointed out, were “a function of the volume of credit so granted.” The flaws in this system soon became tragically apparent, ruining many unwitting investors.

Smith was quite clear on the question of who bore the responsibility:

The community depends upon the fraternity of bankers to see to it that the credit of the community is not squandered, that it is sound in character and can be depended upon…No Federal Reserve or other system can be devised to protect the quality of credit if bankers throughout the country do not apply sound judgment in the making of each loan.

Maybe the conservatives are right. Standards have been lowered to least common denominator.