Bernanke remarks at the Economic Club of New York on the day that “Stocks Post Biggest Drop Since 1987 Crash as Retail Sales Fall, Commodities Sink and Investors Worry About Hedge Funds”
A motivation of this blog is capturing a small fragment of history as it is expressed on the World Wide Web. The Credit Crisis has been a main focus for the last 14 months due to its impact on capitalist society, especially in relationship to Globalization. Ben Bernanke’s speech yesterday is an excellent consolidation of events and actions by the Fed, the Administration, and Congress. First, let’s look at economic news from the Wall Street Journal on the day of the speech to sketch the economic climate. I will bold items in the article for skimming.
From the Wall Street Journal “Economic Fears Reignite Market Slump”:
Fears of a deep recession sparked the worst drop in the Dow Jones Industrial Average in 21 years, as retail sales tumbled, demand for commodities sank and bank earnings fell.The latest data suggest the U.S. economy is poised to fall into its deepest recession since the early 1980s. That news, coupled with renewed signs of trouble in the all-important markets for credit, reignited the sell-off in stock markets, all but wiping out the huge gains that shares had made in Monday’s rally.
The Dow dropped 733.08 points, or 7.9%, to 8577.91 as recession fears and continuing doubts about the world financial system’s prospects shook investors. Wednesday’s decline marked the Dow’s largest percentage drop since October 1987 and the second-biggest point drop ever. The index is down 21% this month and almost 40% from its record close a year ago.
Other indexes plunged, too, including the Standard & Poor’s 500 stock index, which fell 9.03%. Overall, investors lost about $1.1 trillion in U.S. stock-market value on Wednesday, the second day in history that they have lost more than $1 trillion in one day.
In Asia Thursday morning, markets were down sharply, including Tokyo’s Nikkei Stock Average, off 9.7% in early trading.
In another sign of economic weakness, demand for the most important raw materials continued to slide, with oil and copper prices falling sharply.
With the big drop in stocks, many investors fled into safe-haven instruments like the two-year Treasury bond, which rose in price, sending its yield down to 1.6%, while the 10-year bond price rose slightly to yield 4%.
The stock market was unnerved late in the day by new fears of instability in the financial system, this time in the hedge-fund industry. Traders heard talk that hedge fund Citadel Investment Group, whose funds are down between 26% and 30% for the year, was facing margin calls. The rumors fed an already anxious market, where investors have grown worried that some big, highly debt-dependent hedge funds could fail, causing more market declines…
Mr. Bernanke subtly left open the possibility of interest-rate cuts in the weeks or months ahead, noting inflation pressures have receded as a result of falling commodities prices.
But it’s far from clear how much effect further rate cuts would have. Investors have been demanding huge premiums — known on Wall Street as spreads — over benchmark interest rates to make loans to businesses and households. As long as these spreads remain large, the benefits of rate cuts are diminished. A big priority for now remains calming the fear that has swept through financial markets.
Evidence is mounting that the U.S. is likely to experience a far worse downturn than the 2001 or 1990-91 recessions. Job losses started at the beginning of this year but started deepening last month, even before the worst of the credit crisis struck. The degree of the declines is sapping consumer incomes after a decade showing few earnings gains for most Americans…
The Commerce Department said its broad gauge of retail sales dropped 1.2% last month, a much sharper decline than in July and August. The figures followed weak September sales reports last week by major retailers, and confirmed that the economy was softening before this month’s market turmoil, suggesting deeper declines in the coming months. Consumer spending, which accounts for more than 70% of the U.S. economy, is likely to record declines in the third and fourth quarters of this year.
Retail sales slipped in almost every sector. Auto sales fell 3.8%, while furniture, electronics, clothing and food stores also declined.
The troubles are weighing heavily on the global economy. Weak prospects around the world are pushing commodity prices sharply lower, a sign that strong demand — which led to huge price surges earlier this year — has abated with the economic turmoil. Crude-oil prices tumbled $4.09, or 5.2%, to $74.54 a barrel, its lowest settlement price this year.
Meanwhile, the continuing turmoil in credit markets is likely to hit the banking sector hard in the coming months. J.P. Morgan Chase & Co. and Wells Fargo & Co., two of the nation’s strongest banks, on Wednesday said their consumer operations are likely to worsen for months amid weaker performance of mortgages, credit cards and auto loans. J.P. Morgan, which is one of the nation’s largest credit-card issuers, said charge-offs — reflecting loans considered to be uncollectible — represented 5% of its card portfolio compared with 3.64% in the third quarter of 2007. That’s expected to grow to 6% in the beginning of next year and 7% by the end of 2009, the bank said.
The Federal Reserve’s latest “beige book” report, a summary of regional economic conditions, showed weakness across the nation into early October. Consumer spending declined, manufacturing activity dropped and several regions reported lower capital spending or reductions in capital spending plans “due to the high level of uncertainty about the economic outlook or concerns over the availability of credit.” Among the few bright spots were agriculture and other natural resources, though drops in commodity prices since the reports were compiled could hurt those sectors.
Job losses, which started at the beginning of this year, are expected to worsen as businesses feel the credit pinch. The effects of the worsening economy were on display at retail outlets around the country.
After years of conspicuous consumption, many middle- and upper-income Americans are morphing into cautious shoppers. The change in mood could have a dramatic effect on consumer spending on everything from cars and travel to electronics, fashion and jewelry, especially heading toward the holiday season. That’s a radical change from the 2001 economic slowdown when many people shopped to feel better.
In Chicago, Fanchon Simons, an avid 60-year-old shopper, says she couldn’t bring herself to buy a $360 blouse that she tried on at a designer-clothing boutique last week. Ms. Simons says she hasn’t bought much for herself in the past couple weeks — and not because she can’t afford it. Buying “is not that important to me right now because of the climate,” she says. “Maybe it’s a way to be in sympathy with the rest of the people…or maybe it’s that I don’t really need anything.”
High-end consumers aren’t the only ones pinching pennies or turning to window-shopping. Synetha Chambers, a 31-year-old single parent from Cedar Hill, Texas, who makes $25 an hour as a service representative for AT&T, says she has pared her grocery list to the necessities — milk is a must, but she no longer buys soda and chips. “And I will be honest with you, Christmas is no longer a necessity in my household,” Ms. Chambers says.
In recent weeks, a slew of forecasters have predicted that holiday spending this year is likely to be at the lowest level in nearly two decades. The National Retail Federation plans to release a survey Thursday reporting that U.S. consumers plan to spend an average of $832.36 on holiday-related shopping, up 1.9% from a year earlier. It is the lowest increase in planned consumer spending since the survey began in 2002. The survey was conducted Sept. 30 to Oct. 7.
Here is a pod cast from the PBS Online NewsHour with a perspective on the days events.
Now lets look at Bernanke’s Remarks which is a concise history and well articulated. The full speech is below the break by Federal Reserve Chairman Ben S. Bernanke before the Economic Club of New York, delivered on October 15, 2008. First, here is the edited and annotated transcript for skimming.
Bernanke Remarks on the Crisis and Stabilization
On what caused the Credit Crisis:
As in all past crises, at the root of the problem is a loss of confidence by investors and the public in the strength of key financial institutions and markets. The crisis will end when comprehensive responses by political and financial leaders restore that trust, bringing investors back into the market and allowing the normal business of extending credit to households and firms to resume…This financial crisis has been with us for more than a year. It was sparked by the end of the U.S. housing boom, which revealed the weaknesses and excesses that had occurred in subprime mortgage lending. However, as subsequent events have demonstrated, the problem was much broader than subprime lending. Large inflows of capital into the United States and other countries stimulated a reaching for yield, an underpricing of risk, excessive leverage, and the development of complex and opaque financial instruments that seemed to work well during the credit boom but have been shown to be fragile under stress. The unwinding of these developments, including a sharp deleveraging and a headlong retreat from credit risk, led to highly strained conditions in financial markets and a tightening of credit that has hamstrung economic growth.
What the Fed did as an initial response in 2007 and the Spring of 2008:
• First, following classic tenets of central banking, the Fed has provided large amounts of liquidity to the financial system to cushion the effects of tight conditions in short-term funding markets.• Second, to reduce the downside risks to growth emanating from the tightening of credit, the Fed, in a series of moves that began last September, has significantly lowered its target for the federal funds rate. Indeed, last week, in an unprecedented joint action with five other major central banks and in response to the adverse implications of the deepening crisis for the economic outlook, the Federal Reserve again eased the stance of monetary policy.
Yet, the credit crisis continued:
Notwithstanding our efforts and those of other policymakers, the financial crisis intensified over the summer as mortgage-related assets deteriorated further, economic growth slowed, and uncertainty about the financial and economic outlook increased. As investors and creditors lost confidence in the ability of certain firms to meet their obligations, their access to capital markets as well as to short-term funding markets became increasingly impaired, and their stock prices fell sharply.
Perspective on normal policy and justification for the strong intervention which began in September 2008:
The Federal Reserve believes that, whenever possible, the difficulties experienced by firms in financial distress should be addressed through private-sector arrangements–for example, by raising new equity capital, as many firms have done; by negotiations leading to a merger or acquisition; or by an orderly wind-down. Government assistance should be provided with the greatest reluctance and only when the stability of the financial system, and thus the health of the broader economy, is at risk. In those cases when financial stability is broadly threatened, however, intervention to protect the public interest is not only justified but must be undertaken forcefully and without hesitation.
Comments illuminating the Fed’s perspective on Freddie Mac, Fannie Mae, Lehman Brothers and AIG:
Fannie Mae and Freddie Mac present cases in point. To avoid unacceptably large dislocations in the mortgage markets, the financial sector, and the economy as a whole, the Federal Housing Finance Agency put Fannie and Freddie into conservatorship, and the Treasury, drawing on authorities recently granted by the Congress, made financial support available.The difficulties at Lehman and AIG raised different issues. Like the GSEs, both companies were large, complex, and deeply embedded in our financial system. In both cases, the Treasury and the Federal Reserve sought private-sector solutions, but none was forthcoming. A public-sector solution for Lehman proved infeasible, as the firm could not post sufficient collateral to provide reasonable assurance that a loan from the Federal Reserve would be repaid, and the Treasury did not have the authority to absorb billions of dollars of expected losses to facilitate Lehman’s acquisition by another firm. Consequently, little could be done except to attempt to ameliorate the effects of Lehman’s failure on the financial system.
In the case of AIG, the Federal Reserve and the Treasury judged that a disorderly failure would have severely threatened global financial stability and the performance of the U.S. economy. We also judged that emergency Federal Reserve credit to AIG would be adequately secured by AIG’s assets. To protect U.S. taxpayers and to mitigate the possibility that lending to AIG would encourage inappropriate risk-taking by financial firms in the future, the Federal Reserve ensured that the terms of the credit extended to AIG imposed significant costs and constraints on the firm’s owners, managers, and creditors.
The Financial Crisis spreads to the real economy, threatening catastrophic consequences unless the government intervened even more deeply. Commercial Paper in this instance = direct link from financial market crisis to the real economy:
AIG’s difficulties and Lehman’s failure, along with growing concerns about the U.S. economy and other economies, contributed to extraordinarily turbulent conditions in global financial markets in recent weeks. Equity prices fell sharply. Withdrawals from prime money market mutual funds led them to reduce their holdings of commercial paper–an important source of financing for the nation’s nonfinancial businesses as well as for many financial firms. The cost of short-term credit, where such credit has been available, jumped for virtually all firms, and liquidity dried up in many markets. By restricting flows of credit to households, businesses, and state and local governments, the turmoil in financial markets and the funding pressures on financial firms pose a significant threat to economic growth.
Treasury and the Fed are compelled in September and October of 2008 to take deeper action:
• To address illiquidity and impaired functioning in commercial paper markets:
- The Treasury implemented a temporary guarantee program for balances held in money market mutual funds to help stem the outflows from these funds.
- The Federal Reserve put in place a temporary lending facility that provides financing for banks to purchase high-quality asset-backed commercial paper from money market funds, thus reducing their need to sell the commercial paper into already distressed markets.
- Moreover, we soon will implement a new, temporary Commercial Paper Funding Facility that will provide a backstop to commercial paper markets by purchasing highly rated commercial paper directly from issuers at a term of three months when those markets are illiquid.• To address ongoing problems in interbank funding markets, the Federal Reserve has significantly increased the quantity of term funds it auctions to banks and accommodated heightened demands for temporary funding from banks and primary dealers.
• Also, to try to mitigate dollar funding pressures worldwide, we have greatly expanded reciprocal currency arrangements (so-called swap agreements) with other central banks.
• Indeed, this week we agreed to extend unlimited dollar funding to the European Central Bank, the Bank of England, the Bank of Japan, and the Swiss National Bank. These agreements enable foreign central banks to provide dollars to financial institutions in their jurisdictions, which helps improve the functioning of dollar funding markets globally and relieve pressures on U.S. funding markets.
It bears noting that these arrangements carry no risk to the U.S. taxpayer, as our loans are to the foreign central banks themselves, who take responsibility for the extension of dollar credit within their jurisdictions.
These steps are helping the bank system:
The expansion of Federal Reserve lending is helping financial firms cope with reduced access to their usual sources of funding and thus is supporting their lending to nonfinancial firms and households.
“Nonetheless, the intensification of the financial crisis over the past month or so made clear that a more powerful, comprehensive approach involving the fiscal authorities was needed to address these problems more effectively”:
• The Emergency Economic Stabilization Act (the Administration, with the support of the Federal Reserve, asked the Congress for a new program aimed at stabilizing our financial markets): provides important new tools for addressing the distress in financial markets and thus mitigating the risks to the economy. The act allows Treasury to buy troubled assets, to provide guarantees, and to inject capital to strengthen the balance sheets of financial institutions. The act also raises the limit on deposit insurance from $100,000 to $250,000 per account, effectively immediately.
• The Troubled Asset Relief Program (TARP) authorized by the Emergency Economic Stabilization Act will allow the Treasury, under the supervision of an oversight board that (Bernanke) will head, to undertake two highly complementary activities.
- First, the Treasury will use the TARP funds to help recapitalize our banking system by purchasing non-voting equity in financial institutions. Details of this program were announced yesterday. Initially, the Treasury will dedicate $250 billion toward purchases of preferred shares in banks and thrifts of all sizes. The program is voluntary and designed both to encourage participation by healthy institutions and to make it attractive for private capital to come in along with public capital. We look to strong institutions to participate in this capital program, because today even strong institutions are reluctant to expand their balance sheets to extend credit; with fresh capital, that constraint will be eased. The terms offered under the TARP include the acquisition by the Treasury of warrants to ensure that taxpayers receive a share of the upside as the financial system recovers. Moreover, as required by the legislation, institutions that receive capital will have to meet certain standards regarding executive compensation practices.
- Second, the Treasury will use some of the resources provided under the bill to purchase troubled assets from banks and other financial institutions, in most cases using market-based mechanisms. Mortgage-related assets, including mortgage-backed securities and whole loans, will be the focus of the program, although the law permits flexibility in the types of assets purchased as needed to promote financial stability. Removing these assets from private balance sheets should increase and liquidity and promote price discovery in the markets for these assets, thereby reducing investor uncertainty about the current value and prospects of financial institutions. Unclogging the markets for mortgage-related assets should put banks and other institutions in a better position to raise capital from the private sector and increase the willingness of counterparties to engage. With time, the provision of equity capital to the banking system and the purchase of troubled assets will help credit flow more freely, thus supporting economic growth.
These measures are moves towards a more stable Financial System in the future.
Yet, there is still “the immediate problem of lack of trust and confidence.” The Administration, Congress and the Fed have taken the above measures, yet that does not mean a return of credit to markets. Looking at LIPOR and the TED, the banks are hoarding capital to keep their books solvent in the future instead of taking on the risk of lending to opaque institutions whose books may or may not be toxic:
Accordingly, also announced yesterday was a plan by the Federal Deposit Insurance Corporation (FDIC) to provide a broad range of guarantees of the liabilities of FDIC-insured depository institutions, including their associated holding companies. The guarantee covers all newly issued senior unsecured debt, including commercial paper and interbank funding, and it will also cover all funds held in non-interest-bearing transactions accounts, such as payroll accounts. This broad guarantee will be effective immediately, and fees for coverage will be waived for 30 days. After the 30-day grace period, banks may continue to participate in the guarantee program by paying reasonable fees.
Articulating what the Tax Payer has invested in and what their risk is to the Tax Payer now that the Federal Government has deeply intervened into the Financial Markets:
…(T)he taxpayers’ interests were very much in our minds and those of the Congress when these programs were designed.
• The costs of the FDIC guarantee are expected to be covered by fees and assessments on the banking system, not by the taxpayer.
• In the case of the TARP program, the funds allocated are not simple expenditures, but rather acquisitions of assets or equity positions, which the Treasury will be able to sell or redeem down the road.
• Indeed, it is possible that taxpayers could turn a profit from the program, although, given the great uncertainties, no assurances can be provided.
• Moreover, the program is subject to extensive controls and to oversight by several bodies.
• The larger point, though, is that the economic benefit of these programs to taxpayers will not be determined primarily by the financial return to TARP funds, but rather by the impact of the program on the financial markets and the economy. If the TARP, together with the other measures that have been taken, is successful in promoting financial stability and, consequently, in supporting stronger economic growth and job creation, it will have proved itself a very good investment indeed, to everyone’s benefit.
“Stabilization of the financial markets is a critical first step, but even if they stabilize as we hope they will, broader economic recovery will not happen right away.” These measures alone do not correct the trajectory of the economy towards growth.
Conditions restraining the economy:
• Economic activity had been decelerating even before the recent intensification of the crisis.
• The housing market continues to be a primary source of weakness in the real economy as well as in the financial markets
• We have seen marked slowdowns in consumer spending, business investment, and the labor market. • Credit markets will take some time to unfreeze.
• With the economies of our trading partners slowing, our export sales, which have been a source of strength, very probably will slow as well.
The restraining influences are currently being off set somewhat:
• by the favorable effects of lower prices for oil and other commodities on household purchasing power
The big factor according to Bernanke effecting the economy
Ultimately, the trajectory of economic activity beyond the next few quarters will depend greatly on the extent to which financial and credit markets return to more normal functioning.
So far Bernanke has been commenting on the first of his two tier initiatives–supporting economic growth. His second initiative is to control inflation:
• Inflation has been elevated recently, reflecting the steep increases in the prices of oil, other commodities, and imports that occurred earlier this year, as well as some pass-through by firms of their higher costs of production.
• However, expected inflation, as measured by consumer surveys and inflation-indexed Treasury securities, has held steady or eased
• Prices of imports now appear to be decelerating.
• These developments, together with the recent declines in prices of oil and other commodities as well as the likelihood that economic activity will fall short of potential for a time, should lead to rates of inflation more consistent with price stability.
Globalisation measures. “This past weekend, the finance ministers and central bank governors of the Group of Seven industrialized countries met in Washington.”
• We committed to work together to stabilize financial markets and restore the flow of credit to support global economic growth.
• We agreed to use all available tools to prevent failures that pose systemic risk.
• We affirmed we will ensure our deposit insurance programs instill confidence in the safety of savings.
• We agreed to ensure that our banks and other major financial intermediaries, as needed, can raise capital from public as well as private sources.
• We further agreed that we would take all necessary steps to unfreeze interbank and money markets, and that we will act to restart the secondary markets for mortgages and other securitized assets.
• Finally, we recognized that we should take these actions in ways that protect taxpayers and avoid potentially damaging effects on other countries.I believe that these are the right principles for action, and I see the steps announced by our government yesterday as fully consistent with them.
What Bernanke said in closing:
I have laid out for you today an extraordinary series of actions taken by policymakers throughout our government and around the globe. Americans can be confident that every resource is being brought to bear to address the current crisis: historical understanding, technical expertise, economic analysis, financial insight, and political leadership. I am not suggesting the way forward will be easy, but I strongly believe that we now have the tools we need to respond with the necessary force to these challenges. Although much work remains and more difficulties surely lie ahead, I remain confident that the American economy, with its great intrinsic vitality and aided by the measures now available, will emerge from this period with renewed vigor.
The full speech is below the break
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$2.8 Billion Loss at Citigroup on More Write-Downs
New York Times
October 17, 2008
By ERIC DASH
Citigroup reported a $2.8 billion loss in the third quarter, the fourth consecutive period that the global banking giant has been swamped by write-downs on investments and steeper losses on consumer loans.
The bank took more than $13.2 billion in charges in the third quarter, bringing the total amount of write-offs and credit losses since the credit crisis began last year to more than $64 billion.
And as more signs of a global slowdown surface, the bank continues to come under pressure. Although the write-downs in its investment bank declined for the third quarter, losses in Citigroup’s global consumer businesses rose sharply. Credit costs increased 84 percent, to $9.1 billion, driven by charge-offs and reserve increases in the bank’s credit card, consumer finance and banking operations.
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THE RECKONING
New York Times
October 9, 2008
By PETER S. GOODMAN
“Not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient.” — Alan Greenspan, former Federal Reserve chairman, 2004
George Soros, the prominent financier, avoids using the financial contracts known as derivatives “because we don’t really understand how they work.” Felix G. Rohatyn, the investment banker who saved New York from financial catastrophe in the 1970s, described derivatives as potential “hydrogen bombs.”
And Warren E. Buffett presciently observed five years ago that derivatives were “financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”
One prominent financial figure, however, has long thought otherwise. And his views held the greatest sway in debates about the regulation and use of derivatives — exotic contracts that promised to protect investors from losses, thereby stimulating riskier practices that led to the financial crisis. For more than a decade, Alan Greenspan has fiercely objected whenever derivatives have come under scrutiny in Congress or on Wall Street.
“What we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn’t be taking it to those who are willing to and are capable of doing so,” Mr. Greenspan told the Senate Banking Committee in 2003. “We think it would be a mistake” to more deeply regulate the contracts, he added.
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Asia’s revenge
Financial Times
By Martin Wolf
Published: October 8 2008 19:54 | Last updated: October 8 2008 23:48
“Things that can’t go on forever, don’t.” – Herbert Stein, former chairman of the US presidential Council of Economic Advisers
What confronts the world can be seen as the latest in a succession of financial crises that have struck periodically over the last 30 years. The current financial turmoil in the US and Europe affects economies that account for at least half of world output, making this upheaval more significant than all the others. Yet it is also depressingly similar, both in its origins and its results, to earlier shocks.
To trace the parallels – and help in understanding how the present pressing problems can be addressed – one needs to look back to the late 1970s. Petrodollars, the foreign exchange earned by oil exporting countries amid sharp jumps in the crude price, were recycled via western banks to less wealthy emerging economies, principally in Latin America.
This resulted in the first of the big crises of modern times, when Mexico’s 1982 announcement of its inability to service its debt brought the money-centre banks of New York and London to their knees.
Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard University identify the similarities in a paper published earlier this year.* They focus on previous crises in high-income countries. But they also note characteristics that are shared with financial crises that have occurred in emerging economies.
This time, most emerging economies have been running huge current account surpluses. So a “large chunk of money has effectively been recycled to a developing economy that exists within the United States’ own borders”, they point out. “Over a trillion dollars was channelled into the subprime mortgage market, which is comprised of the poorest and least creditworthy borrowers within the US. The final claimaint is different, but in many ways the mechanism is the same.”
The links between the financial fragility in the US and previous emerging market crises mean that the current banking and economic traumas should not be seen as just the product of risky monetary policy, lax regulation and irresponsible finance, important though these were. They have roots in the way the global economy has worked in the era of financial deregulation. Any country that receives a huge and sustained inflow of foreign lending runs the risk of a subsequent financial crisis, because external and domestic financial fragility will grow. Precisely such a crisis is now happening to the US and a number of other high-income countries including the UK.
These latest crises are also related to those that preceded them – particularly the Asian crisis of 1997-98. Only after this shock did emerging economies become massive capital exporters. This pattern was reinforced by China’s choice of an export-oriented development path, partly influenced by fear of what had happened to its neighbours during the Asian crisis. It was further entrenched by the recent jumps in the oil price and the consequent explosion in the current account surpluses of oil exporting countries.
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I’ve been real busy at work yet this cartoon with these paragraphs had to go up pronto. However, the end of the essay does not have to be true if we add in a Green Revolution which would wind that wrecking ball down.
From the Financial Times:
The market for ideas – like the market for shares – always overshoots. Ideas become fashionable and get pushed to their logical conclusion and beyond, as their backers succumb to “irrational exuberance”. Then comes the crash.
What we are experiencing now is the bust that has followed the 30-year bull run in conservative ideas that began with the Thatcher-Reagan revolution of 1979-80.
You can get a sense of how quickly the intellectual atmosphere has changed by picking up a copy of Alan Greenspan’s The Age of Turbulence, which was published last year. Mr Greenspan, head of the Federal Reserve from 1987 until 2006, heaped praise on the magic of financial markets and decried the foolishness of those who called for more regulation: “Why do we wish to inhibit the pollinating bees of Wall Street?” he asked rhetorically. Why indeed?
Mr Greenspan was considered such a guru that last year Senator John McCain suggested putting him in charge of a committee on tax reform, adding: “If he’s alive or dead it doesn’t matter. If he’s dead, just prop him up and put some dark glasses on him.” But Mr Greenspan’s reputation is now on the slide and Mr McCain has reinvented himself as a champion of regulation – and is denouncing the “corruption and unbridled greed that has caused a crisis on Wall Street”.
This kind of ideological whiplash is what happens when an intellectual bull market crashes. The current financial crisis can be traced to three of the central ideas of the Reagan-Thatcher era: the promotion of home ownership, financial deregulation and a fervent faith in the market. Each of these ideas did sterling service for 30 years, increasing prosperity and freedom. But pushed too far – and combined – they have created a disaster.
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Click image to enlarge
