Dow Down 777

Here is how a financial crisis like ours was handled 101 years ago.

In the fall of 1907, it took J.P. Morgan just eight weeks to resolve a credit crisis similar to ours. Several years of buoyant growth and too much risk-taking in poorly understood investments led to needs for capital that could not be met. Morgan, then 70, locked the nation's top bankers into the ornate library at his home for late-night confession sessions. He asked them to lay bare their balance sheets, keeping himself alert with endless Havana cigars.



The bankers reviewed one another's assets and liabilities. Morgan then decided which financial institutions had to go and which would live, getting commitments from the survivors and from the U.S. Treasury for infusions of capital. This Panic of 1907 had rattled the New York Stock Exchange and the markets for gold and municipal bonds, ruined several banks and trust companies, and nearly bankrupted New York City. Share prices fell by half. But once Morgan was done knocking banking heads together, markets swiftly recovered.

No doubt it is not desirable for so much power to be in the hands of one person and, regardless, it would be impossible now to pull off what Morgan did then. Still, comparing Morgan's bold decisiveness with the endless dithering, hand ringing and whiny incriminating by the clowns who pass as leaders today in Washington, you can't help wonder why there are no longer men of integrity anymore on Wall Street (believe it or not, they did exist). They most certainly would have agreed with the following.

As sophisticated as we are now, with hundreds of categories of debt available on a single trading screen, in some ways more information about assets and liabilities was available in 1907, when the workflow device for traders was a simple pencil and scrap paper. We also seem to have forgotten a basic point well known to Morgan, who would have recalled the panics of 1837, 1857, 1873 and 1897: Until prices are established, credit panics will not end and financial firms will remain frozen. The lesson of previous credit crises is that the sooner new valuations are set for bank assets and liabilities, the sooner recovery begins.

That will happen, of course, but only when the markets have reached bottom; when you lance a boil it has to drain until the toxins are gone. Otherwise it comes right back, worse than before.

(Thanks to L. Gordon Crovitz's Information Age on WSJ.com.)