In a March 21, 2008 column titled, "The Roots of Crisis," published in the guardian.co.uk, Jeffrey Sachs concludes that the roots of the financial crisis had its foundation
in 2001 at the end of the Internet boom and the shock of the September 11 terrorist attacks. It was at that point that the Fed turned on the monetary spigots to try to combat an economic slowdown. The Fed pumped money into the US economy and slashed its main interest rate - the Federal Funds rate - from 3.5% in August 2001 to a mere 1% by mid-2003. The Fed held this rate too low for too long.
The next part of Sachs' story sounds familiar. Monetary expansion lowers borrowing costs, weakens the dollar, and increases inflation. New borrowing was concentrated in housing where commercial and investment banks created new types of collateralized securities which expanded lending to borrowers with little creditworthiness, and through feedback loops, the bubble inflates.
Sachs believes that much of the blame for today's financial crisis
rests with "the Fed, helped by wishful thinking of the Bush administration.
It was the Fed that maintained an easy money policy, and declined to regulate "dubious" lending practices. Of course, Alan Greenspan, who has gone from hero to zero, was the chairman at the time but Ben Bernanke does not escape with a free pass. Sachs notes,
At a crucial moment in 2005, while he was a governor but not yet Fed Chairman, Bernanke described the housing boom as reflecting a prudent and well-regulated financial system, not a dangerous bubble. He argued that vast amounts of foreign capital flowed through US banks to the housing sector because international investors appreciated "the depth and sophistication of the country's financial markets.
Seven months later, in a Financial Times Economists Forum article titled, "The best recipe for avoiding a global recession," Sachs presents his plan for solving our current economic difficulties. It is global in nature:
(1) Western central banks should extend swap lines to countries with emerging markets.
(2) the International Monetary fund should extend low-conditionality loans to all countries that request it.
(3) Western central bankers should pressure banks not to withdraw credit from foreign operations.
(4) China, Japan and South Korea should take coordinated macroeconomic expansion.
(5) Middle Eastern countries should invest in emerging and low income countries,
(6) The U.S. and Europe should expand export credits to low and middle-income countries, and finally,
(7) The U.S. and Europe should follow expansionary fiscal policy aimed at infrastructure and transfers to cash-strapped states, and no tax cuts.
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The Right Monetary and Fiscal Policy Can not Get Us Out of the Depression
ReplyDeleteDIE ZEIT: Can the right monetary and fiscal policy keep the US out of a recession?
Alan Greenspan:
"Probably not. Global forces can now override most anything that monetary and fiscal policy can do. Long-term real interest rates have significantly more impact on the core of economic activity than the individual actions of nations. Central banks have increasingly lost their capacity to influence the longer end of the market.
Two to three decades, ago central banks were dominant throughout the maturity schedule.
Thus, the more important question is the direction of long-term real interest rates."
Alan Greenspan
The Great Irony of Success
© ZEIT online, 30.1.2008
A Credit Free, Free Market Economy will correct all of those dysfunctions.
The alternative would be, on the long run, to wait for the physical destruction (through war or rust) of most of our productive assets. It will be at a cost none of us can afford to pay.
This Age of Turbulence People Want an Exit Strategy Out of Credit,
An Adventure in a New World Economic Order.
A Specific Application of Employment, Interest and Money
Press release of my open letter to Chairman Ben S. Bernanke:
Sorry, Chairman Ben S. Bernanke, But Quantitative Easing Won't Work.
Yours Sincerely,
MC Shalom P. Hamou AKA 'MC Shalom'
Chief Economist - Master Conductor
1776 - Annuit Cœptis.
"(6) The U.S. and Europe should expand export credits to low and middle-income countries, and finally,"
ReplyDeleteWow. So let's play the carousel and pass the debt to low and middle-income countries? Sounds cute from the economic perspective, but a social disaster for those low and middle-income countries; and I care about those countries.
"(7) The U.S. and Europe should follow expansionary fiscal policy aimed at infrastructure and transfers to cash-strapped states, and no tax cuts."
I'd say, give tax cuts to the middle and lower class, and increase taxes on the wealthy. The money collected from taxes, which certainly has more validity than those I.O.U's that nobody ever paid and sunk the nation's submarine deep down where not even Captain Nemo can save it, would see a sharp increase. That would greatly help the country get more stable by having actual money to pay back those darn debts.
Going bankrupt should not even be an option, of course (And allowing for individual people to do that is a horrible mistake which at the end hurts us all!)