Left-handed Complement

MUDGE’s Musings

I can’t help it — our turbulent economic news continues to cause concern.

And, as we’ve pointed out, it’s increasingly top of mind most everywhere.

As a topic, it has appeared here with depressing regularity (depressing topic but lively and insightful commentary, of course!):

Pointed here by American.com here’s a useful analysis that lays out the causes of the financial system’s deep crisis, and you might be surprised at the source: St. Alan Greenspan and the Federal Reserve that, directed by Greenspan’s successor, Ben Bernanke, now is portraying itself as our white knight.

The Roots of America’s Financial Crisis

by Jeffrey D. Sachs

CAMBRIDGE – The US Federal Reserve’s desperate attempts to keep America’s economy from sinking are remarkable for at least two reasons. First, until just a few months ago, the conventional wisdom was that the US would avoid recession. Now recession looks certain. Second, the Fed’s actions do not seem to be effective. Although interest rates have been slashed and the Fed has lavished liquidity on cash-strapped banks, the crisis is deepening.

To a large extent, the US crisis was actually made by the Fed, helped by the wishful thinking of the Bush administration. One main culprit was none other than Alan Greenspan, who left the current Fed Chairman, Ben Bernanke, with a terrible situation. But Bernanke was a Fed governor in the Greenspan years, and he, too, failed to diagnose correctly the growing problems with its policies.

Most unusual about the boom that developed when the Fed dropped interest rates after 9/11 is that it was concentrated in one sector of the economy: housing.

A lot of eggs in a very large basket, made even larger by the deregulated greed that led many very smart finance guys to develop increasingly “creative” financial instruments.

Housing lending was so easy to come by, that bankers cheerfully forgot to perform due diligence on the loans they so cheerfully scarfed up.

The result: meltdown as the “get-me-dones,” who had snapped up mortgages from brokers who didn’t require proof of credit worthiness or even income (since they were making their money on the commissions paid to them by the banks and weren’t ever concerned about such minor details as, will the loan ever be paid back?) found themselves unable to meet their obligations. And the cascade of foreclosures finally woke up the banks to the house of cards their assets had become.

[Please click the link below for the complete article — but then please come on back!]

Project Syndicate

It’s always been about the money. Perhaps next time I’ll take a look at the points in U.S. history where banking excesses and shenanigans tore the entire economy to pieces: 1873, 1907, of course, 1929. These are the events that finally caused the outcry that couldn’t be ignored, and that led to the creation of such institutions as this very same Federal Reserve Bank that purports to know what’s best for us.

See, financiers and investment bankers are wizards highly skilled in the alchemic arts of spinning gold from dross, until they get caught out. And then their failures and greed become a general economic nightmare.

And of course, those financiers who begged the government to deregulate the industry so they could be free to make the profits that let so many of them buy those islands in the Caribbean, were first in line for Fed assistance when the gravy train abruptly derailed.

So while Dr. Bernanke and his Fed continue to throw liquidity at the crisis, the primary outcomes are inflation, record commodity prices, and a murderously devalued dollar.

I am not impressed with Doc Bernanke, Hank Paulson, and the rest. I am, in fact, quite concerned.

Nine months, 17 days until Jan. 20, 2009, and a new broom. Hope we all get there with a roof over our heads.

It’s it for now. Thanks,

–MUDGE

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This entry was posted on Thursday, April 3rd, 2008 at 9:15 pm and is filed under History, Politics. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.