Here is the exchange:
Rose: "Looking back, what are the mistakes and what should you have done more of? Where were your instincts right, but you didn't go far enough?"Two Points To Make:
Geithner: "...I would say there were three types of broad errors of policy and policy both here and around the world. One was that monetary policy around the world was too loose too long. And that created this just huge boom in asset prices, money chasing risk. People trying to get a higher return. That was just overwhelmingly powerful."
Rose: "It was too easy."
Geithner: "It was too easy, yes....
1- I am still trying to figure out why Charlie Rose didn't come up with this follow up question - "Why Will This Time Be Any Different"?
2- Does Geithner have the slightest bit of a clue that his current policy is more of the same, but exponentially more ludicrous and disastrous then Greenspan's?
The major flaw in Geithner's policy is that at the height of the crisis there was too much cheap money chasing higher returns with obscene leverage. He basically makes the point to state that this wasn't his or Obama's crisis, but heck I am out of ideas!
A huge side effect was that investors seeking meaningful returns inflated the bubble taking flyer's on overpriced, risky securities. Toxic structured products are the obvious example. Credit rating agencies get lots of blame as enablers, rating trash "AAA." But fixed-income investors wanted an excuse to invest in riskier stuff that carried slightly higher yields.
Truly low risk securities like Treasury's and money market instruments were yielding so little, they were of no use to portfolio managers trying to match assets with liabilities.
But what happens when low-risk fixed-income securities yield 0% or close to that? Asset managers are more or less forced to seek higher interest rates through riskier investments.
Remember Managers were chasing ALPHA...Screw the BETA.
So what are the results of the latest experiment with rock-bottom rates?
Investors are piling back into risky investments across the board as the high yield debt market is exploding.
Geithner admits such a policy was a disaster before, that the "overwhelmingly powerful" force of low rates inflated the bubble. So how can he and Bernanke justify the same approach this time around?
No doubt they will argue that they have no other choice, as they have to continue with feeding the Wall Street Machine.
Just enable the same Ponzi Scheme System that relies on credit and needs credit to flow or else it will collapse. It doesn't occur to these guys that the system itself is flawed and corrupt, and that we need a total gut wrenching renovation, not just another coat of paint.
No doubt de-leveraging would be quite violent and unbelievably painfull if the Federal Reserve Board left rates higher. But de-leveraging is the only solution to the crisis. God forbid Bernanke's easy money policy actually works. God forbid he actually rescues the economy by reflating the credit bubble. This was Greenspan's magic trick thru-out the 90's. De-leveraging came out of no where. It happened quickly and violently whether we want it to or not. There is much more de-leveraging in store globally.
Better to rip the band-aid off quickly, before they start tagging toes.
Geithner will not move to deleverage because he doesn't know how, and he knows he isn't up to the task of dealing with the fallout since he's in the dark as to what might or will happen. He isn't capable of an independent decision! We the taxpayer, will live with this 'life without parole' sentance for the next 30 years or more.
ReplyDeleteThe Deleveraging is going to happen one way or the other....Its not for Geithner to decide. The Obama Administration would have gone the UK Route with the banks but they just didnt have the horses to do it.
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