Monday, July 13, 2009

The Curse of Easy Money

Where is Alan Greenspan? I have not really heard from him. Then again have we not heard enough of Mr. Greenspan?

The main culprit is Greenspan, let me just say there is a lot of blame to go around, but when ordinary citizens make mistakes, it generally effects one family, when a man with the enormous power,influence,and responsibility makes a mistake in policy and judgment, well you see the results. Lets forget about lower rates for one second, this man went out of his way for Wall Street to have no regulation what so ever, then made speech after speech telling us everything is self correcting. He went as so far as to say in late 2005, that home prices weren't to frothy as there was sufficient equity in homes to cover any down slide.

All in all, there were many economists who were warning us that complex derivatives would end up in disaster, that they needed to be regulated, every time they were downplayed by Greenspan, Robert Rubin, etc.

Greenspan, the champion of free markets, remained impassive to the point he was clearly frustrated to have to state his position.

In 1998, LTCM blew up because they badly miscalculated trading liquidity in their positions. They needed to be bailed out.

And what did Greenspan do? He lowered interest rates. Then the next bubble, the so-called New Economy, began to grow in Silicon Valley. It burst in the spring of 2000. What did Greenspan do? He lowered interest rates. This time the reduction was massive, with the benchmark rate dropping from 6 percent to 1 percent within three years. This was the cardinal error/sin. After the 2000 crash, interest rates were lowered very aggressively and left too low for too long

While the economy was recovering from the demise of the dotcom sector and from the terrorist attacks of 9/11 cheap money was already on its way to triggering the next excess. This time it took place in the housing market, and this time it would be far more devastating.

There was never a safety net to operate under, because we as a country lives off of credit, as long as credit was easy things would sort it self out.

It was the making of an EPIC GREEK TRAGEDY.

5 comments:

  1. Lower Rates
    Lower Rates
    Lower Rates

    ReplyDelete
  2. Sad but true. 30 years ago Carter basically went out there and said that we need to get our act together and fundamentally (does anyone actually understand that word anymore?)improve the foundations of our economy. What happens? We say, "no thanks" and go with "best times are ahead of us" Reagan and start living off of credit as if it was free money. Five presidents later we're reaping the shitstorm of living outside of our means.

    ReplyDelete
  3. Lower Rates
    Lower Rates
    Lower Rates

    ReplyDelete
  4. Sad but true. 30 years ago Carter basically went out there and said that we need to get our act together and fundamentally (does anyone actually understand that word anymore?)improve the foundations of our economy. What happens? We say, "no thanks" and go with "best times are ahead of us" Reagan and start living off of credit as if it was free money. Five presidents later we're reaping the shitstorm of living outside of our means.

    ReplyDelete