Peter Hartcher: Who's to Blame for the Financial Crisis?

Speaking from an Austrian School economics perspective, I found Mr. Hartcher's reasoning more or less sound in very broad terms. Certainly he seems to "get it" moreso than most mainstream US financial chroniclers. But he's not gone far enough, and that's allowed him to have a serviceable sense of the crisis and why we're in it, but prevents him from understanding the lowest root cause of it and the only way we can bust free of this repeating crisis framework.

He blames Greenspan primarily, lax gov't regulation and oversight secondarily, and then as a tertiary cause the poor management by Geithner, Paulson, Bush, Obama, et. al. of the developing crisis situation as elements creating the present deep global crisis. He goes onto cast a wary eye on current moves by global central banks to inject liquidity as only providing the fuel for the next crisis.

Yes, to a student of Austrian School economics, the central bank role in creating "free" money is central to these problems, the booms, the busts and their crises. What puts me off of Mr. Hartcher somewhat is his (perhaps pragmatic) approach to prevention of future crises. While he acknowledges that Greenspan's central banking policy of easy money was the root of this evil, he seems to suggest that it is a firmer regulatory policy stance and, in a way, smarter central bankers, who will safeguard the world from the next crises.

That...is ridiculous. He was right at the start. It was indeed easy money which lead to the malinvestment. The money sought places to go, and this time with this bubble it went into housing and "innovative" financial derivatives tied to it.

What I think he's not feeling is the relationship of the creep in "innovation" in financial markets and slack-off in regulatory policy as _responses_ to the easy money appearing all around the financial system. Banks and investment houses could see the excess money right in front of their eyes. Their business was to try to put it to work, for themselves and their clients. This was also government's desire, to try to use the excess money to cause it to become cheaper to finance a home. "Innovations" and a slacking of regulation were the natural solutions to achieve these ends, from their point of view.

The problem, core all along, was the central bank, the Fed. That is to say the problem was the easy money the Fed created out of thin-air, and excessive fractional-reserve banking which magnified the Fed money creation through extension of vast sums of credit money not backed by anything real.

For more on this, turn to http://mises.org

But in here suffice it say that Mr. Hartcher would suggest to us that to avoid this sort of thing in the future really requires nothing more than better vigilance to try an interdict the various causal factors that precipitated this crisis:

Tighter central-bank monetary policy, bolstered/renewed regulation, more smarter government.

Poppy-cock!

None of the other causal factors could have materialized if the easy (thin-air) money created by the Fed hadn't existed. Mr. Hartcher's answer is better management all-round. But the answer is really sound money and no central banking.

In such a situation, a crisis could still happen, but its scope is naturally checked by market forces. Money cannot be created out of thin air by a central bank, it's effect unduly magnified by pyramiding commercial and consumer bank credit to companies and people on top of that fake money.

Rather than putting the health of the entire economy into the hands of beneficent (but invariably always corruptible and fallible) managers of central banks and government regulatory bodies, we instead place our faith into the "market" which is the combined result of all the millions of investment and purchase and savings decisions we people and businesses make every day.

We might not always and everywhere like the market results, but insofar as the market represents our choices made, it's the only bit we can really trust. The only management then needed is for open and transparent dealing, clear contracts, and the rule of law, with government protecting property rights.

That's essentially a nutshell view of Austro-libertarian politico-economic thinking. We decide what we want, those decisions form a market. If we don't like it, the market influences us to make changes to try and get a better outcome, and government's only role is to insure that promises between parties to a deal are known and kept.

Finally...in the US we had been closer to this idea before the Federal Reserve existed, and certainly before the New Deal and the rise of positivist and progressive politics created a culture of government reliance.

And, it was no perfect panacea! But those crises in themselves were the result also of money creation (excessive fractional-reserve banking, government circulation of unbacked legal tender notes, etc.), and bankruptcy served its intended purpose of eliminating quickly all the fake money created by fiat, and allowing people to once again make valid economic calculations based on money of true and known value, not suspect paper of questionable and uncertain worth. Modern central banking only permits governments to distort the market for money. Even if manipulated with the best of intentions, humans aren't perfect. A free and unfettered market allows economic errors to be limited in scope. They'll usually accrue just to the bad entrepreneurs or consumers with poor judgement. Central banking centralizes control of the economy. If the Fed men get it wrong, we wind up with unsustainable booms of malinvestment, followed by unavoidable busts of crushing austerity...or wealth robbing inflation.

The Glass-Steagall Act of 1933 established the Federal Deposit Insurance Corporation (FDIC) in the United States and included banking reforms, some of which were designed to control speculation. Some provisions such as Regulation Q, which allowed the Federal Reserve to regulate interest rates in savings accounts, were repealed by the Depository Institutions Deregulation and Monetary Control Act of 1980. Provisions that prohibit a bank holding company from owning other financial companies were repealed on November 12, 1999, by the Gramm-Leach-Bliley Act.

The bill that ultimately repealed the Act was introduced in the Senate by Phil Gramm (Republican of Texas) and in the House of Representatives by Jim Leach (R-Iowa) in 1999. The bill was passed by Republican majorities on party lines by a 54-44 vote in the Senate and by a 343-86 vote in the House of Representatives. After passing both the Senate and House the bill was moved to a conference committee to work out the differences between the Senate and House versions. The final bill resolving the differences was passed in the Senate 90-8 (1 not voting) and in the House: 362-57 (15 not voting). ' The legislation was signed into law by President Bill Clinton on November 12, 1999.

The banking industry had been seeking the repeal of Glass-Steagall since at least the 1980s. In 1987 the Congressional Research Service prepared a report which explored the case for preserving Glass-Steagall and the case against preserving the act.[7]

One point of fact, the Glass-Steagell act was signed into law by Pres Bill Clinton on 12 Nov 1999, not early 2000 as Mr Hartcher mentions.

Otherwise, an excellent presentation.

Great talk. I am a little embarrassed how much more these intelligent Australians know about the US economy compared with the average US citizen.