Fed Rethinks Stance on Popping Bubbles
"[O]bviously, the last decade has shown that bursting bubbles can be an extraordinarily dangerous and costly phenomenon for the economy, and there is no doubt that as we emerge from the financial crisis, we will all be looking at that issue and what can be done about it," Fed Chairman Ben Bernanke said this week.
(NYT) Since mid-2007, when the credit crisis erupted, the country’s nine largest banks have written down the value of their troubled assets by a combined $323 billion. With a recession looming, the pain is unlikely to end there.
(...)
In the case of the nine-largest commercial banks — Citigroup, Merrill Lynch, Bank of America, Morgan Stanley, JPMorgan Chase, Goldman Sachs, Wells Fargo, Washington Mutual and Wachovia — profits from early 2004 until the middle of 2007 were a combined $305 billion.
The Greenspan Bubble was a time of great economic "growth", on the back of huge "profits" for the financial sector (which reached 40% of total corporate profits). The profits proved to be imaginary. Can we also acknowledge that the growth was also imaginary, and thus that "reforms" (deregulation, labor market flexibility, tax cuts) DO NOT WORK, except to channel massive sums towards a happy few!?
The Financial Times was kind enough to publish a Letter to the Editor earlier this week on this very topic, with a nicely explicit title (the letter was notionally a reaction to Martin Wolf's article on the 'savings glut" theory, which I discussed here):
Much-touted prosperity of the west was fake
Sir, The "savings glut" theory that Martin Wolf resurrects (October 9) is a dangerous attempt to find mitigating factors to what is the root cause of the financial crisis: the reckless dereliction of duty by central bankers, politicians and financial leaders.
While Asia's mercantilist policies, and its desire no longer to have capital account deficits, are very real, its savings surplus has been largely created and fed by policies in the west. Central banks, led by Alan Greenspan's Fed, maintained absurdly low interest rates for too long despite massive asset bubbles whose existence they denied against all evidence until the last possible minute. In fact, these bubbles were a desired result, as they allowed for massive profits by the financial sector, and made it possible to hide from the general population the stagnation of their incomes caused by parallel policy measures such as labour market deregulation.
Fundamentally, people in the western hemisphere lived above their means. Together, these policies created an appearance of prosperity for all (gross domestic product was up, on the back of strong income growth at the top) while effectively organising a vast transfer of wealth from the many to the few. The Asians were happy to tag along, as it allowed them to develop their infrastructure and economies, but it is unfair to blame them for the fact that the much touted - and very unequally shared - prosperity of the past years in the west was essentially fake, as the current crisis reveals the hard way.
Jérôme Guillet,
Editor, European Tribune
See the updated list of diaries on the financial crisis and the Anglo Disease and, of course, my earlier series on 'Bubbles' Greenspan - most of which diaries were posted on DailyKos from 2005 onwards.