Monday, September 15, 2008

Comments on the financial crisis

I don't usually comment on the markets unless there's a policy issue to be discussed. The capitalist pigs can take care of themselves. Markets go up in the long term, and the capitalist pigs will be fine in the long term.

However, the present crisis was brought about by short term thinking, a race to keep up with competitors, ineffective regulation of the markets and ineffective monetary policy.

As to the first two points, investment banks kept investing in mortgage related securities since everyone was making big profits doing it. Long term, this wasn't sustainable.

As to the point about ineffective regulation of the markets, I'm not saying that more regulations are good per se. I am saying that proper regulations could have forestalled the crisis, but these weren't put in place.

As to the last point about ineffective monetary policy, Alan Greenspan cut interest rates too low, which increased the money supply. He also refused to regulate the markets. In other words, much of the mess we are in is his fault.

I talked to a former financial planner who was discerning to enter the Episcopal clergy. She had given up hope in the financial markets. Personally, I wouldn't give up hope. However, the United States needs to make structural changes to contain the excesses of the financial system.


Edit: I should correct myself. Businesses go through booms and busts. It is life. Economies are highly complex, and they cannot be regulated down to the last detail even if it were desirable to do so. However, prudent regulations could have reduced the degree of the fallout.

2 comments:

Richmond BC realtor said...

I believe ridiculous interest rate back in 2001 is the key. We are talking about capitalism, free market, free pricing, but the most important price - the price of money - is set administratively and often (too often!) misused to gain some short term political advantage. And here is the result. I think we can't blame certain businessman from certain bank - they were just doing, what was the best for their companies at that moment. We can blame Greenspan, but did he have free will, or was he just listening orders??
Take care
Jay

W said...

Jay,

The US Federal Reserve is politically independent. Al certainly shared a political ideology with Ron and both Georges, but I doubt he was just listening to orders.

I have seen no evidence that the Fed sets interest rates at the instructions of the US government. I don't think Bush and his cabinet have the competency to manipulate interest rates either. If you have contradictory information, please feel free to share it.


Additionally, I think it is perfectly reasonable to blame some business owners for the crisis. The most negligent owners, like the management teams at Fannie and Freddie, caused damage on a national scale. The CEOs of Wamu and Wachovia ran their businesses recklessly, and ran them into the ground.