“That men do not learn very much from the lessons of history is the most important of all the lessons of history.” These are the simple, yet exceedingly relevant for our times, words of the famous English writer, Aldous Huxley. If only Federal Reserve chairman Ben Bernanke would acquaint himself with this quote.
For three years, between 2001 and 2004, in an effort to boost the economy after the 911 terrorist attacks, his predecessor at the Fed, Alan Greenspan, kept the Federal Funds Interest Rate under two percent. As a result, cheap money and low introductory teaser rates fueled the largest housing boom in American history. Then, like all fake boom phases, when interest rates rose, it came to an end. The necessary correction phase started and all the malinvestment of the boom phase was no longer sustainable under higher rates. Foreclosures increased. As housing prices fell back to earth, underwater mortgages and abandoned homes were everywhere. Many still find themselves unemployed and destitute.
Now, instead of letting the market go through a much needed correction after the crisis began, new Federal Reserve chairman Ben Bernanke pursued a policy bent on “stabilizing” the value of assets. Since 2008, Bernanke’s Fed has kept the Federal Funds Interest Rate close to zero percent and it has increased its balance sheet by just under three trillion dollars by purchasing Treasuries and mortgage-backed securities from member banks.
Some economists believe Chairman Bernanke’s policies have created a housing recovery. These economists believe this because they haven’t learned from history, especially recent history.
But, according to David Stockman, the former head of the Office of Management and Budget under Reagan, what Bernanke’s policies have created is simply another housing bubble. He sees a similar combination of artificially low interest rates and speculation producing the current housing boom just like the boom during Greenspan’s tenure.
Article comments
— go to most recent comments1 - Glenn Contrarian
Kenn -
“That men do not learn very much from the lessons of history is the most important of all the lessons of history.”
Right. Now how many nations based on libertarian principles are there among the first-world nations today? Oh, right - NONE.
But back to your article:
Interestingly enough, beyond the manipulation of the Federal Funds Interest Rate you didn't even mention the effects of regulation or the lack thereof. You didn't address the effects of easy access to credit, sub-prime loans, the effects of credit default swaps, and the dangers of derivatives, all of which combined with the interest rates (that you correctly pointed out were a problem) to make a kind of perfect storm. It wasn't just the interest rates - it was the whole deregulated system:
...almost three years after stepping down as chairman of the Federal Reserve, a humbled Mr. Greenspan admitted that he had put too much faith in the self-correcting power of free markets and had failed to anticipate the self-destructive power of wanton mortgage lending.
“Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief,” he told the House Committee on Oversight and Government Reform.
Critics, including many economists, now blame the former Fed chairman for the financial crisis that is tipping the economy into a potentially deep recession. Mr. Greenspan’s critics say that he encouraged the bubble in housing prices by keeping interest rates too low for too long and that he failed to rein in the explosive growth of risky and often fraudulent mortgage lending. (boldface mine)
It wasn't just that interest rates were kept too low for too long - it was that the market was pretty much deregulated. At the time, the lenders would lend to anyone as long as they were breathing, but hopefully the Dodd-Frank legislation will mitigate that particular practice.
I agree that a correction was necessary and it occurred (and my house got foreclosed in the process (and it hurt))...but it was and is unnecessary for everything to drop back to rock bottom. Why? Because property values had to be preserved - not just for the sake of the property tax income that keeps local, municipal, and state governments afloat, but also to protect small businesses. Why? When one's business property isn't worth anything close to what it was, it all of a sudden becomes that much harder to use that as collateral for business loans.
Don't get me wrong - I don't agree with everything Bernanke did. I think that he should have pushed to put a whole lot of bankers and hedge fund managers and CEO's in jail. But your premise that low interest rates were what led to the housing bubble is faulty, for it focused on only one part of the big picture and did not address how the other factors each poured fuel on the fire...and because those other factors have been exposed today to regulators with the teeth and the will to enforce those regulations, there is no reason to assume that low interest rates in and of themselves will drive us back into another housing boom/bust.
2 - Kenn Jacobine
Glenn, without the Fed's low interest rates the criisis would not have happened. Low interest rates were the gasoline in the engine. It made the motor go. And the point is that nothing has changed and we are doing it again. This time under Obama - oh yes, the Republicans have thwarted he ability to regulate. I guess that is true even between 2009-2011 when he had majorities in both houses of Congress an a lot of political capital himself.
Price fixing never works. But you think like the politicians - if one of our policies messes up the economy, we can't admit we were wrong, we simply just need more government involvement (regulations). But those regulations are elusive because the industries they are meant to regulate write them. But the people are stupid and dont know that, so we can always push for more. And before you know it, we have a mess like the health care industry. But our scapegoat will always be those greedy insurers.
BTW - the reason the investment banks were irresponsible was because theyhad an implicit guarantee to be bailed out. Notice I said investment bank because as I have proven in the past, the institutions that got in ttrouble were not covered by the late Glass Steagle anyway.
3 - Glenn Contrarian
Kenn -
See, that's just how much you don't know.
I guess that is true even between 2009-2011 when he had majorities in both houses of Congress an a lot of political capital himself.
He did have majorities in both houses, but he only had a filibuster-proof majority in the Senate for a grand total of 72 in-session days. By early summer of '09, the GOP could and did filibuster almost everything that Obama tried to pass...precisely in accordance with what their leadership agreed to do in a meeting the night before his inauguration. They filibustered far more bills than at any time in American history. The current filibuster of Vietnam Vet and Purple-Heart-awardee Republican Chuck Hagel is the first time in American history that a nominee for Defense Secretary has been filibustered.
It is not for nothing that I have repeatedly stated that Obama faced the most obstructive Congress since the Civil War. That, sir, is a true statement.
So don't tell me that he could have done anything he wanted to for two years - that's false. He had his way for 72 in-session days, until Scott Brown won Ted Kennedy's old seat.
Price fixing never works. But you think like the politicians - if one of our policies messes up the economy, we can't admit we were wrong, we simply just need more government involvement (regulations).
Did you not read what Greenspan said? Greenspan had been strongly conservative and had been FOR deregulation...and then he stated quite clearly above that he was wrong.
You're an historian, Kenn, so you should be able to objectively look at the world's nations and tell me which countries are succeeding and which are not. Would you care to show me even ONE example from the beginning of the twentieth century until the present day where a nation was able to prosper at even close to the same level as the regulated economies?
What you're doing wrong is you're starting with your assumptions about government regulations and trying to make the circumstances fit your beliefs. What you should be doing is looking at the most successful nations and asking yourself "Why are they the most successful? What do they have in common?" and use your conclusions to help shape your belief. But you won't do that because that would force you to question your own beliefs.
the institutions that got in ttrouble were not covered by the late Glass Steagle anyway.
Really? Like Bank of America? I suggest you take a look at this list of bailed-out banks and rethink that statement.
4 - Kenn Jacobine
What is Greenspan going to say, it is my fault? Why would you quote the man who was at the center of producing the crisis?
Obama didn't have the time to get financial regulation done, but he had time to totally take over the health care system? What was more important, fixing the current problem or a longer term problem. Besides we did get Dodd/Frank. But, I guess since that is not preventing this next housing bubble, you prefer to ignore it. You are partisan and clueless Glenn.
5 - Kenn Jacobine
Your list indicates banks that got money to "prop up capital and support new lending". It doesn't mean they needed the money to avoid bankruptcy. Hell a community bank that I am invested in got money and they had no sub-prime loans on their books. This is just an example of crony capitalism pure and simple. Face it Glenn, the Fed is the bankers piggy bank. As a good Keynesian, I am surprised you don't yell for the Fed to print money and hand it to consumers instead. Why should the banks get all the fun?
6 - Kenn Jacobine
The implied guarantee of a bailout was based on Greenspan's decisions surrounding Long Term Management - a speculating hedge fund. In some circles he is known as "Mr. Bailout".
7 - Igor
What's truly astounding was Greenspans childlike belief in self-correcting economics.
Bankers committed palpable fraud, repeatedly, yet none went to jail. So, who can you trust?
8 - Glenn Contrarian
What's truly astounding was Greenspans childlike belief in self-correcting economics.
Same thing goes for all libertarians and most conservatives.
9 - Glenn Contrarian
Kenn -
Obama didn't have the time to get financial regulation done, but he had time to totally take over the health care system?
You're developing a real habit of building strawmen, since all Obamacare essentially does is (1) ensure that almost all Americans have access to health insurance - almost all of which will be provided by the private sector, (2) help them to be able to afford said health insurance, and (3) ensures that at least 80% of the revenue taken in by those insurers is actually used for health care. But don't let that stop you from building strawmen, now!
What was more important, fixing the current problem or a longer term problem. Besides we did get Dodd/Frank. But, I guess since that is not preventing this next housing bubble, you prefer to ignore it. You are partisan and clueless Glenn.
If you knew your recent history, you would know that the stimulus came first, that we were officially out of the recession by August of 2009 (though that doesn't mean that we had recovered from it - sorta like stopping a plane's death dive and leveling out the flight doesn't mean that the plane's back up to the proper altitude yet), and THEN he got to work on Obamacare. Dodd-Frank did come after that...but we had to understand first exactly what had happened and then figure out what was needed to fix it - and then negotiate with the most obstructionist Congress since the Civil War to get it passed.
Furthermore, if you knew your American economic history, you'd know that this was not the first correction in housing prices we'd had...but none of the corrections before had all the other factors I listed above, factors which became an economic vicious circle.
But you go on building strawmen, now.
Your list indicates banks that got money to "prop up capital and support new lending". It doesn't mean they needed the money to avoid bankruptcy. Hell a community bank that I am invested in got money and they had no sub-prime loans on their books. This is just an example of crony capitalism pure and simple. Face it Glenn, the Fed is the bankers piggy bank.
You should have said, "Your list also indicated some banks that were not in danger of bankruptcy" - your statement could be misleading otherwise. Besides, are you really aware of the inner workings of the community bank you were invested in? How was their liquidity status? Do you know? If it wasn't good, are you so naive to think they'd actually tell you? If you'll check, a significant part of the Great Recession was that it was also a liquidity crisis.
Was the bailout perfect? Of course not. Did it stop us from going into another Depression? According to most economists, ABSOLUTELY. Maybe you would have enjoyed seeing America find out what the Weimar Republic was like, but most of us would rather avoid that.
As a good Keynesian, I am surprised you don't yell for the Fed to print money and hand it to consumers instead. Why should the banks get all the fun?
If you had half the clue about Keynesian economics as you think you do, you'd know that's not Keynesian economics.
And I'm still waiting for you to tell me why it is that ALL the non-OPEC first-world nations are socialized democracies - I mean, hey - if (as you seem to believe) market forces would drive socialized democracy into the dustbin of history while those nations with small governments with weak regulations should be booming! But NONE of that is happening! Even given the stupid-assed austerity measures that are hurting Greece and Spain much more than necessary, they're still first-world nations.
Neither you nor Clavos nor any other conservative or libertarian has been able to answer that simple question in the two years I've been asking it. Sometimes it takes guts to address a question that casts doubt onto one's long-held beliefs. Do you have guts enough to address the question?
10 - Igor
In '89 after the S&L debacle over 1000 bankers were sent to jail.
11 - Glenn Contrarian
I know - that's one thing that Reagan did that I wish Obama would have done.
12 - troll
Glenn's question has been addressed in both economic and military terms in these threads - a third facet of a comprehensive explanation would have to be epidemiological...the diseases that emerged out of the cesspool that was Europe destroyed numerous civilizations which were modeling alternative social structures before the invading barbarians could fully appreciate and incorporate the better principles of these alternatives
13 - Igor
@5-Kenn: a couple points in passing:
-bankers DO regard the Fed as their piggy bank, after all, they appoint the Fed Governors. We should change that, but they're too hooked on it and they have too much power.
IMO bankers were given too much latitude and they soon succumbed to temptation.
-Ben Bernanke once jokingly said that the best way to increase the money supply was to fly over cities in a helicopter scattering large bills. It's the fairest way. He got the moniker "helicopter Ben" from that comment.
14 - Glenn Contrarian
troll -
Glenn's question has been addressed in both economic and military terms in these threads - a third facet of a comprehensive explanation would have to be epidemiological...the diseases that emerged out of the cesspool that was Europe destroyed numerous civilizations which were modeling alternative social structures before the invading barbarians could fully appreciate and incorporate the better principles of these alternatives
That's not quite true. 'Socialized democracy' - as we know it today - is a relatively recent development. While one could try to make the case that its roots lay with the Magna Carta, the practical application of socialized democracy - the implementation of a social safety net - didn't come until the advent of socialized health care in Germany in the 1880's and the weakening of royalty in Germany and England.
In other words, there's been lots of chances for other types of government to work. It is true that there were other forms of government that were certainly successful and protected the rights of the individual - the Iroquois nation comes to mind - but in order to implement such a system, you have to (1) sell that system to enough people for them to choose to change their sociopolitical framework to the new paradigm - no easy task! - and (2) determine whether that system would actually work given our modern interdependent and information-driven world society.
In other words, it's one thing to point out what one thinks is a better way, but it's another thing altogether to show that has a ghost of a chance of working in the real world. That's why I'm a strong supporter of socialized democracy, because that's what's working the best in the real world, and what has brought its citizens the highest standard of living in human history.
15 - Kenn Jacobine
Yes, that is right , Glenn. Germany since the 1880s has been so much more prosperous than the U.S. because her citizens have socialized health care. And she hasn't been prone to starting a couple of world wars, a period of hyperinflation, and being ruled by a madman either. It has worked well for her.
16 - Doug Hunter
"'Socialized democracy' - as we know it today - is a relatively recent development."
Nations have only recently become wealthy enough to support these systems. For some reason the analogy that always comes to my mind is that of the horse and carriage. Capitalism is the horse pulling the carriage (welfare state) which has it harnessed in. You get a strong horse and you can hook quite the carriage up to it. I'd rather gallop bareback into the future risking my neck, but I recognize the comfort and safety of the decked out carriage trotting along as well. Too much horse you get pulled along quick for a bumpy ride, but too much carriage you ease along at the back of the pack and can even stop progressing completely. The old saying you can't put the cart before the horse applies as well, which is why I support allowing unbridled capitalism into undeveloped countries. It may eat all their grass and shit on them today, but eventually they'll slip a halter around it's neck and ride into the sunset.
17 - Glenn Contrarian
Kenn -
Yes, that is right , Glenn. Germany since the 1880s has been so much more prosperous than the U.S. because her citizens have socialized health care. And she hasn't been prone to starting a couple of world wars, a period of hyperinflation, and being ruled by a madman either. It has worked well for her.
Yes, and it's worked out SO terribly for England, Australia, Canada, and the rest of non-OPEC first world nations since then, huh? I pointed out Germany in order to show just how recent socialized democracy is in human history.
And remember, the Great Recession hardly touched Canada and Australia. According to your economic beliefs, it should have devastated them.
18 - Glenn Contrarian
Doug -
which is why I support allowing unbridled capitalism into undeveloped countries. It may eat all their grass and shit on them today, but eventually they'll slip a halter around it's neck and ride into the sunset.
You forget - I've got a home in one such third-world nation with largely unbridled capitalism (the Philippines). And it's far more capitalistic than America - taxes on the people almost nonexistent, regulation is a joke, and anything - anything at all - can be had, for a price...and you can't get anything at all unless you have money.
Here's a quick story when it comes to lack of regulation. There's no smog control there, no emissions standards. So what happens? When you look down the road, you see a black-tinged cloud about a half-klick down the road: that's the accumulated exhaust from the cars clouding the air between you and that spot down the road. And when you get home, you blow your nose and a bunch of black snot comes out of your nose - that's the soot that didn't go into your lungs.
There's little regulation of business, almost none at all of food. Caveat emptor is how one lives there. It doesn't mean that one can't live well and happily there, but it does mean that you're completely on your own. And don't even think of being able to take Big Business to court! In the land of unbridled capitalism, Juan Doe has precisely zero protection against the vagaries of Big Business. If Big Business screws you over, all you can do is to go elsewhere - you can't even argue with them...'cause if you do, you might find out the hard way what being salvaged means.
So you know what happens with unbridled capitalism? There's a truly nice area - it's called "Fort Bonifacio Global City" if you want to look it up. It's really nicer than any comparably-sized area between Vancouver B.C. and San Francisco, right down to the Lamborghini and Maserati showrooms. But go a kilometer in any direction, and you're back among the squatters and the children running up to your car begging for a few pisos so they can eat. Supply-side trickle-down economics? That's so much bullshit. To paraphrase Charlie Rangel, the people there never got the trickle, but they sure as hell got the down.
I've seen it first-hand, Doug, I've lived it - and I can tell you that it doesn't work like you think it would.
19 - Doug Hunter
Glenn, according to the World Bank GDP has grown 16.8% in the Philippines since 2008 compared to 0.8% in the US where we carry a larger welfare load. You have to have money before you can redistribute it and what the Philippines is doing is what is required for growth rates 1700% larger than ours over four years. Unrestrained capitalism is working to build the wealth and one day once they are wealthy they will choose to spend that wealth on welfare luxuries (your social democracy) like most other countries do. I bet their growth rates get lower then as well. Again, a horse without a big load can run ahead quite a bit faster and they're playing catchup. The end result is worth the growing pains.
20 - trollop
"'Socialized democracy' - as we know it today - is a relatively recent development."
however older forms of socialized democracies wealthy enough to support safety nets based on small government and more direct approaches to democracy than those we know today might well have existed - see the recent work of Charles Mann (1491and 1493) and the older work of Jack Weatherford (Indian Givers) for evidence supporting this alternative narrative
perhaps the anarchy in Chiapas represents the tip of an iceberg of some cultural memory of such things and we will find that America's true exceptionality resides with what's left of her indigenous populations...this idea allows the more optimistic amount us to imagine a future based on something other than our whitebread fantasy of eternal domination
in any case I see no reason in any of these responses to consider Glenn's initial question - why are all non-OPEC first world countries (defined as those with today's highest standards of living) socialized democracies (defined as those post-1880 countries with large elected governments enforcing strong regulations and safety nets) - unanswered
21 - Kenn Jacobine
Glenn,
England, Australia, and Canada have never been as prosperous as the U.S either. Do you live on planet earth?
22 - Glen Contrarian
Kenn -
England, Australia, and Canada have never been as prosperous as the U.S either. Do you live on planet earth?
REALLY? Are you talking in terms of gross domestic product, perhaps? Or maybe you're thinking of GDP per capita...which doesn't always take into account the fact that Americans - unlike their counterparts in the rest of the non-OPEC first world - have to pay through the nose for health care, and outside our big cities it's expected that one must have a car...which is not the case in most other places in the world.
But when was the last time you visited Canada or Australia? They're both beautiful and every bit as modern as America. Australia's suffering from the effects of climate change, but try finding any sizable American city that is as nice, as clean, and as fully modernized as Sydney or Vancouver!
I spent three days in Vancouver a little over a year ago, and I specifically looked for homeless, for trash, for graffitti - it's a habit I gained after Singapore - and let me tell you that there's no sizable city in America that compares...
...which is why Vancouver's perenially chosen as one of the top most livable cities in the world. So is Sydney.
Kenn, you've spent a lot of time as an expat, but you've apparently been missing a lot of lessons that the rest of the world has to teach us.
23 - Glen Contrarian
Doug -
in the Philippines since 2008 compared to 0.8% in the US where we carry a larger welfare load. You have to have money before you can redistribute it and what the Philippines is doing is what is required for growth rates 1700% larger than ours over four years.
Doug, you're showing your ignorance. That big growth rate isn't showing great success - it's showing how low a bar they're having to clear. I do so wish I could take you for a tour there - I'd take you to the nice places - not only Fort Bonifacio but to the malls (three of the world's ten largest malls are within a ten mile radius in Manila - with the possible exception of the Mall of America our malls are almost laughably small in comparison) where you can walk by the top of the line stores. In December my wife and I walked down Rodeo drive, and you know what? With the possible exception of Tiffany's, I saw the same stores (and more of them) in Manila. Yes, Manila and the Philippines in general is booming...
...until you see the millions and millions of poor, of squatters. There's nowhere in America that compares. No American who has not walked through a third-world slum really knows what poverty is...
...and it puts the lie to that 1700% growth rate. That growth rate means that there's a few million people who can afford high-end items...but there's millions and millions more who can't even dream of it.
24 - Glenn Contrarian
troll -
in any case I see no reason in any of these responses to consider Glenn's initial question - ...- unanswered
Now I've been accused many times of having poor reading comprehension, so instead of giving a blanket denial that there has been no such answer, I'll just ask you exactly where those answers were because I really don't see anything that addresses my question concerning the current state of the world.
Concerining those older apparent forms of small-government socialism to which you refer - even if they existed and worked well - this would probably be IMO a case of comparing apples to oranges since we cannot - cannot - have the level of technological advancement that we have today without the government-enforced regulation and government-funded infrastructure that enables said technological advancement. If what you're looking for is a peaceful, pastoral life, then that small-government socialism might well work better than any modern form of government. It all depends on what you're willing to give up to have that kind of government.
I had a long debate with Cindy in which I took the position that government on anarchist principles could not exist...and it was the example of Chiapas that proved me wrong. That said, such can only exist when there is no need to compete militarily with other, more aggressive nations. Furthermore, I would also the ability of such a government to stand up to multinational corporations.
25 - troll
Glenn - as 'you vere der' (thanks for the memories Igor) all along the way it might prove more instructive were you to restate the arguments from the various threads - economic military and epidemiological - as you understand them and your refutation of each
at this point I'll simply propose that in some senses histories do shape the current state of affairs
and concerning the separate question of possible alternative forms of organization when you say ...we cannot - cannot - have the level of technological advancement that we have today without the government-enforced regulation and government-funded infrastructure that enables said technological advancement. I say you don't know what people are and aren't capable of and that your claim is just that and not an argument...and as usual all your claim boils down to is that what is is and is therefore necessary