I was asked to participate in InvestorHome.com’s Global Financial Crisis Survey. Here are my answers to the survey questions (I didn’t answer #1 since it asked about my view of the report of the Financial Crisis Inquiry Commission, which I haven’t read):
2. Which narrative presented by Douglas Elliott and Martin Baily of the Brookings Institute in Telling the Narrative of the Financial Crisis: Not Just a Housing Bubble best represents the causes of the Financial Crisis?
It was the fault of the government.
3. I believe the crisis is ongoing and there will be no recovery. Another crash is coming!
4. What were the primary causes of the Global Financial Crisis?
The primary cause was the Federal Reserve’s policy of lowering interest rates below where they otherwise would be if determined by a free market through monetary inflation. With the dollar as the world’s reserve currency, other central banks followed suit. Also contributing to the housing bubble that precipitated the crisis was the U.S. government’s policy of encouraging homeownership and the role of the government-sponsored enterprises in buying up mortgages and inventing their securitization. The government-legislated oligopoly of the credit ratings agencies rubber stamped them with AAA ratings, and the Fed, in addition to purchasing government debt, also bought mortgage-backed securities, thus sending the message to foreign banks that they were as good as U.S. Treasuries. Furthermore, the implicit promise of taxpayer bailouts for the large financial institutions incentivized riskier behavior.
5. What still should change as a result of the crisis?
None of the underlying causes of the crisis have been addressed. On the contrary, in response to the crisis brought about by its inflationary monetary policy, the Fed, a government-legislated monopoly over the supply of currency and credit, has not only continued but increased its money printing on an insane scale, expanding the monetary base more in the past five years than it had for its entire existence back before that, buying up both long-term government debt and mortgage-backed securities. The promise of taxpayer bailouts remains implicit, or explicit through the federal deposit insurance program. The dollar remains the world’s reserve currency and other nations’ central banks have followed suit in what has been called the “race to debase” their currencies. The artificially low interest rates encourages borrowing and spending at a time when saving and capital investment are necessary to pave the way to a true recovery, and this attempt at price fixing misdirects capital towards unsustainable ends (as it did during the housing bubble). Rather than allowing the market to determine prices and a market correction to occur to liquidate the malinvestment and restructure the economy on a sustainable path, governments have intervened heavily to try to fix interest rates artificially low, prop up housing prices essentially in an effort to reflate the housing bubble, and otherwise continued to do all of the same things that caused the crisis in the first place, only this time on an even bigger scale. The consequences this time around will be much more disastrous than the financial crisis precipitated by the bursting of the housing bubble.