Forget murder mysteries- if you listen to the financial news or the politicians, you realize that the latest whodunnit on everyone’s mind is not who murdered whom in the dining room with a ping pong paddle, but who’s to blame for the late, great, housing bubble. As a scourge it’s been compared to "The Grapes of Wrath" and to Hurricane Katrina, and there’s a lot of people who want to find a head or two served up on a platter.
Roger Bootle, managing director of Capital Economics has one of the better explanations I’ve read in awhile:
if you are still looking for individual scapegoats I suppose the leading candidate must be Alan Greenspan, former chairman of the Fed. Not so long ago feted as saviour of the markets, he could be regarded as the author of the world’s current financial crisis. His first offence was the persistent policy of very low interest rates in an attempt to keep the economy operating near to capacity. His second was his refusal to try to identify and suppress bubbles while they were inflating, preferring instead to clear up the mess once they had burst.
If we focus on groups of people rather than single individuals, could it be said that bankers were responsible for what has gone wrong? Banks operate a system in which risk-taking is systematically rewarded and prudence is not.
Certainly blaming Greenspan and the bankers is nothing new, but Bootle also discusses another culprit- failed policy:
The essence of the problem has been the overwhelming importance placed on maintaining inflation at a low, stable rate and preventing economic slowdowns. In an historical sense this is understandable. Most people in the West have lived through a period of high and variable inflation which, at times, was accompanied by depressed economic activity and high unemployment.
Neither they, nor the policy-makers, have the same searing experience of asset price bubbles. If, as I suspect, the credit crunch severely reduces economic growth and brings serious financial dangers, then I expect that policy-makers will reflect on whether the current policy regime has served us well. They may well conclude that although it did once, its time is past.
It is widely accepted that real economic fluctuations are to be avoided because idle men and machines waste productive potential. And it is widely accepted that inflation is to be avoided because it wastes resources by distorting the price mechanism. By contrast, asset bubbles seem to be widely regarded as pretty harmless, except to the poor devils who are unlucky enough to be holding the stock when the music stops.
But bubbles are also massively distorting of economic activity. Look at the construction booms in America and Spain. And look at the many millions of people in this country [ U.K.] whose lives have been distorted by the housing boom, not just in a narrow economic sense but in the things that go to the very root of their lives - whether to marry or have children, whether to move, where to work. Get one of these cycles badly wrong and it can affect you for life.
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