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Originally Posted by scottw
great article:
A thesis that I offered several years ago is that the credit expansion was a deliberate attempt to cover up America's structural decline. Ironically, by not facing up to the structural and incentive problems ten to twenty years ago when they were tractable (economically if not politically), the political elite created this current crisis. It was not their intent to create a crisis, merely to avoid hard decisions. They did so by "kicking the can down the road" using credit as their vehicle.
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I don't think this entirely the case. Parts of it ring true.
History will show (has shown?) that Alan Greenspan's extraodinarily accommodative monetary policy was the fuel for the crisis (which, by the way, is not over). The dry tinder poised to set off the fuel was a dumbing down of lending standards via "Affordable Housing" goals, starting with the enforcement of the Community Reinvestment Act late in Bush I, and then even more aggressively through Clinton's term.
CRA and affordable housing ultimately led to bad loans being made. Low interest rates led to a lot of bad loans being made. And, low interest rates led to massive leverage in the corporate sector as well. But it started with housing and consumer spending.
As far as the Federal Reserve (which is neither, by the way), people have been trying to figure out why Alan Greenspan acted so recklessly, bringing interest rates to near zero percent from 2001-2004, even as the recession ended in 2001. Did he abandon his free market beliefs? Was he just plain dumb? Or was there another reason?
John Williams of Shadowstats posits an interesting theory, and it is worth posting here:
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Shadow Government Statistics : Home Page
Crises Brewed by Federal Government and Federal Reserve Malfeasance.
The crises have been generated out of and are centered on the United States financial system, triggered by the collapse of debt excesses actively encouraged by the Greenspan Federal Reserve. Recognizing that the U.S. economy was sagging under the weight of structural changes created by government trade, regulatory and social policies — policies that limited real consumer income growth — Mr. Greenspan played along with the political and banking systems. He made policy decisions to steal economic activity from the future, fueling economic growth of the last decade largely through debt expansion. The Greenspan Fed pushed for ever-greater systemic leverage, including the happy acceptance of new financial products, which included instruments of mis-packaged lending risks, designed for consumption by global entities that openly did not understand the nature of the risks being taken. Complicit in this broad malfeasance was the U.S. government, including both major political parties in successive Administrations and Congresses.
As with consumers, the federal government could not make ends meet while appeasing that portion of the electorate that could be kept docile by ever-expanding government programs and increasing government spending. The solution was ever-expanding federal debt and deficits.
Purportedly, it was Arthur Burns, Fed Chairman under Richard Nixon, who first offered the advice that helped to guide Alan Greenspan and a number of Administrations. The gist of the wisdom imparted was that if you ran into problems, you could ignore the budget deficit and the dollar. Ignoring them did not matter, because doing so would not cost you any votes.
Back in 2005, I raised the issue of a then-inevitable U.S. hyperinflation with an advisor to both the Bush Administration and Fed Chairman Greenspan. I was told simply that "It’s too far into the future to worry about."
Indeed, pushing the big problems into the future appears to have been the working strategy for both the Fed and recent Administrations. Yet, the U.S. dollar and the budget deficit do matter, and the future is at hand. The day of ultimate financial reckoning has arrived, and it is playing out.
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Takeaway: Alan Greenspan acted the way he did to foil the encroachment of increasing government regulation that was, in his mind, stifling economic growth.