Ransome

Waiting for the Next Fed Apology

I have some different views. Traditionally, cheap money should fuel investment. At some point, access to cheap money fueled consumer debt and flowed to China, fueling investment and growth in China. This was considered a triumph in globalization.

I think Greenspan was focused on inflation. As long as inflation was contained inexpensive money would be available. I also think that Greenspan was seeing some disconnects but I don't know what they were. It may have been the increase in securitization and money becoming available outside of the regulated environment. At some point, faulty lending looking for more borrowers kept the game going, creating the unstable bubble and sector inflation.

My intuition believes that having the Fed back the banks was a half measure. It prevented immediate collapse. It was just as important to modify the faulty loans and de-lever the consumer as well as banks, as it is the actual loans that are the etiology of all that followed. A bad bank could have purchased the loans at market and restructured them. Buying bad securities as proposed, would have helped the banks but would do nothing for the bad loans. Buying the loans would fix the bad securities and the loans. It is the inattention to the wide spread bad loans and consumer debt that caused the overall long term collapse of the economy. Unhampered speculation in oil pushed the consumer over the edge, destroying all confidence.

It is a bit like mishandling poisoned pet food. You identify the source, contain it, and bail out the factory, while leaving the poisoned food on the market. Relying on banks to repair the loans was a faulty assumption. The banks themselves are not responsible for the economy, they are responsible for themselves.