Why Greenspan Caused The Financial Crisis
Today I have an article on mises.org explaining why Greenspan caused the current economic problems by answering the arguments of the people that deny this.
posted by stefankarlsson at 11:02 PM
6 Comments:
"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.
stefan,
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.
>>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.
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.
Stefan
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?
Earth that was: if you search my blog for "fractional reserve banking" you would know that I side with Rothbard.
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