)"Lost in the Congressional debate over how to provide stimulus is a more fundamental question: Does anyone remember how we got to where we're at?
The answer is Greenspan put the pedal to the medal by irresponsibly slashing interest rates to 1%. Banks thought this was free money and responded by borrowing short and lending long to finance all kinds of risky endeavors but typically centered around residential and commercial real estate.
Residential real estate has long since imploded. Now, a Glut Of Mall Space Headed Our Way will start an implosion in commercial.
Pointing The Finger At Greenspan
I have been pointing the finger at Greenspan for years. Fingers are now flying from many corners. Economist Anna Schwartz blames Fed for sub-prime crisis.
The high priestess of US monetarism - a revered figure at the Fed - says the central bank is itself the chief cause of the credit bubble, and now seems stunned as the consequences of its own actions engulf the financial system. "The new group at the Fed is not equal to the problem that faces it," she says, daring to utter a thought that fellow critics mostly utter sotto voce.
"There never would have been a sub-prime mortgage crisis if the Fed had been alert. This is something Alan Greenspan must answer for," she says. According to Schwartz the original sin of the Bernanke-Greenspan Fed was to hold rates at 1 per cent from 2003 to June 2004, long after the dotcom bubble was over. "It is clear that monetary policy was too accommodative. Rates of 1 per cent were bound to encourage all kinds of risky behaviour," says Schwartz.
She is scornful of Greenspan's campaign to clear his name by blaming the bubble on an Asian saving glut, which purportedly created stimulus beyond the control of the Fed by driving down global bond rates. "This attempt to exculpate himself is not convincing. The Fed failed to confront something that was evident. It can't be blamed on global events," she says.
The lesson of the 1930s is that swift action is needed once the credit system starts to implode: when banks hoard money, refusing to pass on funds. The Fed must tear up the rule-book. Yet it has been hesitant for three months, relying on lubricants - not shock therapy.
Anna has the right target, unfortunately she has the wrong cure: more of the same medicine that made us sick in the first place. The lesson of the 1930's has not been learned. The proper lesson is that there are eventually enormous consequences for unsound credit bubbles. The Fed has responded to every credit crisis with liquidity. Eventually liquidity fails. It fails when the problem becomes solvency not liquidity."(snip)
More to come no doubt.
