If anyone’s interested, TIME Magazine recently gave its top ten list for who’s to blame for this financial crisis. Without further ado, here it is — (accompanied by additional commentary by yours truly):
1. Good Times.
According to TIME’s Justin Fox, “Blithe behavior begat trouble.”
I suppose that’s true. As Charles Kindleberger documented in his book Manias, Panics, and Crashes: A History of Financial Crises, people will often get swept up in a mania, then look absolutely foolish once the bust hits. Kindleberger himself points out that over all of the financial crises in history, none have happened with the frequency that we have seen over the last 50 years or so. Our current financial crisis has befallen us after the collapse of the Internet bubble, which sunk to its greatest depth in 2003.
Historically, manias don’t happen back-to-back. This crisis was not driven by the madness of crowds on Main Street, but rather the insanity that was going on at Wall Street. So, I’ve got to disagree with Time placing this as the #1 reason.
2. Alan Greenspan.
Bingo! Fox and I agree here; I also commend the magazine for coming forward and naming names. As told most succinctly in William Fleckstein’s book Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve, Greenspan engaged in a campaign to avoid a recession by continuing to keep interest rates low over his tenure. He blew bubble after bubble, and now we are paying.
3. Twisted Regulation.
Again, I can agree with Fox on this one, despite my being Libertarian. Washington helped to foster this crisis by passing the laws that allowed banks to start repackaging mortgages and selling them to investors, and turned a blind eye to the obvious conflict of interests that developed.
4. Wall Street.
We’re in agreement here as well.
5. Home Ownership Obsession.
Fox says, “Homeownership generally is a good thing. Massively subsidizing it via the tax code might not be so smart. And turning a blind eye to crazy lending practices because they seem to encourage it definitely is not.” I agree.
6. Too Much Money.
According to Fox, “Lots of people worried for years that the gigantic trade deficits the U.S. ran up with, first Japan, and then China, were hurting domestic manufacturers. But the flip side of those trade deficits — gigantic capital flows into the U.S. — may have been even more dangerous. It was the capital gusher from China in particular that inflated the 2000s real estate bubble.”
TIME neglects to say where all that money came from, though; it was created by the Federal Reserve to help us avoid a recession. Which brings us back to our monetary system.
7. The Myth of the Rational Market.
Wow. Fox and I agree again. I’m happy to see people poking holes in one of economists (Macroeconomists, especially) favorite theories, but I worry that people’s natural reaction will be to call for more regulation.
8: You and Me.
According to Fox, “None of this would have happened if millions of us hadn’t come to believe we could get something for nothing by taking on debts we couldn’t repay. That this misconception was fostered by lenders and politicians is a partial excuse but not a complete one. Thanks to the Panic of 2008, though, we can count on nobody making this mistake again, at least not for a while.”
Man, TIME is starting to sound almost Austrian in its Economic outlook. If people come to realize as Frederick Bastiat wrote that ” … everyone wants to live at the expense of the state, ‘they forget that the state wants to live at the expense of everyone else.’ ” But, despite applauding the integrity of Justin Fox and Time magazine, I think they are wrong in saying that “we can count on nobody making this mistake again…” Indeed, the US Dollar is the ultimate example of something for nothing, and we seem to believe that so completely that the 30-year government bond is currently yielding 3.03%.
9. George W. Bush.
From TIME: “A lot of the government decisions that led to our current pass were bipartisan. Some were the doing of Democrats. But you can’t be a two-term president with your own party in charge of Congress for most of your time in office and escape blame for the economic debacle that unfolds as you prepare to leave town. The specific Bush act that probably contributed most to today’s difficulties? His reckless disregard for sound fiscal policy, as his tax cuts and war spending combined to turn budget surpluses into chronic deficits.”
Sing it, brother!
10. Commodity Futures Modernization Act.
Fox says, “If you had to pick a single government move that did more than any other to muck things up, it was probably this bill, passed by a Republican Congress and signed into law by lame-duck President Bill Clinton in December 2000. It effectively banned regulators from sticking their noses into over-the-counter derivatives like credit default swaps. There’s no guarantee that regulators would have sniffed out the dangers in time, but banning them from even looking sent a pretty clear ;anything-goes; message to OTC derivatives markets.”
This seems a repeat of the ‘twisted regulation’ point they made earlier, but I can’t fault them for recycling material. Especially if it’s valid.
11. Rating Agencies.
Absolutely. When the wizards of modern finance can get together and crank out debt instruments based on subprime mortgages that receive a AAA rating, then something is indeed rotten in the state of Denmark.
12. Letting Lehman Go.
Oh, so close! TIME fumbles the ball while rushing for the touchdown. If banks (particularly investment ones) are improperly run, then they should be allowed to fail. To do otherwise is to court moral hazard.
I’ve gone on about this at length in this blog in previous posts, so I’ll stop here.