Wednesday, December 31, 2008

Why Greenspan Caused The Financial Crisis

Today I have an article on explaining why Greenspan caused the current economic problems by answering the arguments of the people that deny this.


Blogger Celal Birader said...

"But, by fixing interest rates at a certain level the Fed is ultimately responsible for the increases in the money supply and it could have controlled it if it had targeted it instead of interest rates."

Hello Stefan... This raises a question in my mind : Had Greenspan done it differently and not targeted interest rates would he not have risked pushing the American economy into a deflationary scenario which may have been unwelcome but also more immediate than the otherwise (albeit more severe) problems we faced in 2008 ?

BTW, i just read a review of Martin Wolf's book entitled "Fixing Global Finance" written up by Harold James in the Jan/Feb 2008 issue of Foreign Affairs Journal .

The review is subtitled "Who Broke Global Finance and Who Should Pay for It?". If the review is a fair reflection of Wolf's thesis, it would appear Wolf is blaming the Chinese for the mess rather than Greenspan.

3:20 AM  
Blogger Adam Smith said...

A Specific Application of Employment, Interest and Money


This tract makes a critical analysis of credit based, free market economy, Capitalism, and proves that its dysfunctions are the result of the existence of credit.

It shows that income / wealth disparity, cause and consequence of credit and of the level of long-term interest-rates, is the first order hidden variable, possibly the only one, of economic development.

It solves most of the puzzles of macro economy: among which Business Cycles, Stagflation, Greenspan Conundrum, Deflation and Keynes' Liquidity Trap...

It shows that no fiscal or monetary policy, including the barbaric quantitative easing will get us out of depression.

It shows that Adam Smith, John Maynard Keynes, Karl Marx and Alan Greenspan don't contradict each other but that they each bring a meaningful contribution to a same framework for understanding macro economy.

It proposes a credit free, free market economy as a solution that would correct all of those dysfunctions.

In This Age of Turbulence People Want an Exit Strategy out of Credit, an Adventure in a New World Economic Order.

Read It.

7:25 AM  
Anonymous newson said...

good article. i'm surprised that bob murphy hasn't acknowledged the unimportance of reserves in the present monetary regime.

may your blog flourish in 2009.

11:49 AM  
Anonymous Anonymous said...

>>this is especially true after the 1994 reforms they themselves mention that allows banks to "sweep" money from demand deposits (with reserve requirements) to savings deposits and money market funds (without reserve requirements).<<

well, yr own argument as quoted above, seems to prove that >>deregulation<< of banks was exactly the initial and root cause of the problem -- since 1994 was before 2001 (when greenspan reduced interest rates). if banks had adequate reserves, and did not invest in risky securities, there would not have been a problem regardless what greenspan did or did not do.

12:29 PM  
Blogger stefankarlsson said...

Anonymous: you're right that lowering reserve requirements is a form of "deregulation" that create monetary inflation and therefore also contribute to financial bubbles in many cases. And allowing "sweeps" is in effect a form of reduction in reserve requirements.

But since fractional reserve banking is to put it mildly dubious from a libertarian perspective, especially in the context of banks being protected by a central bank, that is not deregulation in the pro-market sense of the word. And while it arguably contributed to the bubble, it was hardly the key cause since reserve requirements were so low to begin with that it only slightly boosted the profitability of increased credit.

7:24 AM  
Blogger earth that was said...


What is your take on "free banking" (i.e. unregulated fractional reserve banking with no central bank apparatus) versus 100% reserve banking a la Rothbard?

1:33 PM  
Blogger stefankarlsson said...

Earth that was: if you search my blog for "fractional reserve banking" you would know that I side with Rothbard.

10:09 PM  

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