Monday, June 1, 2009
"If financial crises were distributed along a bell curve--like traffic accidents or people's heights--really bigones wouldn't happen very often. ... Financial crises will happen. ... For reasons to do with human psychology and the failure of most educational institutions to teach financial history, we are always more amazed when such things happen than we should be. ... In the months ahead, the world will reverberate to the sound of stable doors being shut long after the horses have bolted, and history suggests that many of the new measures will do more harm than good. ... Human beings are as good at devising ex post facto explanations for big disasters as they are bad at anticipating those disasters. It is indeed impressive how rapidly the economists who failed to predict this crisis--or predicted the wrong crisis (a dollar crash)--have been able to produce such a satisfying story about its origins. Yes, it was all the fault of deregulation. ... The German government likes to wag its finger disapprovingly at the 'Anglo-Saxon' financial model, but last year average bank leverage was four times higher in Germany that in the [US]. Schadenfreude will be in order when the German banking crisis strikes. ... The reality is that crises are more often caused by bad regulation than by deregulation. ... The biggest blunder of all had nothing to do with deregulation. For some reason, the [Fed] convinced itself that it could focus exclusively on the prices of consumer goosds instead of taking aset prices into account when setting monetary policy. In July 2004, the federal funds rate was just 1.25 percent, at a time when urban property prices were rising at an annual rate of 17 percent. Negative real interest rates at this time were arguably the single most important cause of the property bubble. ... The old Latin question is highly apposite here: Quis custodiet ipsos custodes? Who regulates the regulators? Until that question is answered, calls for more regulation are symptoms of the very disease they purport to cure", my emphasis, Niall Ferguson (NF), at the NYT, 17 May 2009, link: http://www.nytimes.com/2009/05/17/magazine/17wwln-lede-t.html.
I agree with NF. I saw the Fed's ignoring asset price changes as worse than a blunder. The Fed wanted an asset bubble and it got one. I think Alan Greenspan knew exactly what he was doing.