Archive for October, 2009

The Financial Crisis

Monday, October 12th, 2009

The following is the opening paragraph of Steven M. Davidoff’s article in The New York Times DealBook blog. Oct 5, 2009. It is about assessing the financial crisis and begins…

“There is a conventional view developing on the financial crisis. The Federal Reserve’s policy of historically low interest rates spurred a worldwide search for higher risk and return. Concurrently, the entrenched United States trade imbalance led to a huge transfer of dollar wealth to Asian and commodity-based countries. The unwillingness of Asian economies, particularly China, to stimulate their own domestic consumption led these countries to reinvest the proceeds into the United States. This further contributed to lower American interest rates and further fueled the search for return.”

To which I replied…

“It is interesting that you mention the low cost of borrowing and the surplus of cash available as root causes of the financial crisis.

The conservatives have been begging public policy leaders to get the government out of the borrowing pools so that business can borrow less expensively for expansion through plants and equipment.

That has been the conservative song for decades. So what happened? Rates and the money supply finally became attractive for businesses to borrow and what did they do? Alan Greenspan commented on this at the time. He said “we have a conundrum”, businesses are not spending money on “plants and equipment or on expansion”.

We now know that when business got the cheap money they chose to gamble it levered 30 to 1, in some cases, instead of using it for business.

This finally should put the lie to the old song about keeping the government out of the debt markets so business can get better rates.

When business finally got the cheap money we saw what they did.”

bill