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And ... it's a hat trick

Monday, April 07, 2008

A short time ago, a link came in for this Project Syndicate article by Jeffrey D. Sachs, Professor of Economics and Director of the Earth Institute at Columbia University in New York.

He is also a Special Adviser to United Nations Secretary-General on the Millennium Development Goals and will soon be added to the list of TMTGM-approved economists which, while growing, can still be counted on two hands.

The Roots of America’s Financial Crisis
by Jeffrey D. Sachs

CAMBRIDGE – The US Federal Reserve’s desperate attempts to keep America’s economy from sinking are remarkable for at least two reasons. First, until just a few months ago, the conventional wisdom was that the US would avoid recession. Now recession looks certain. Second, the Fed’s actions do not seem to be effective. Although interest rates have been slashed and the Fed has lavished liquidity on cash-strapped banks, the crisis is deepening.

To a large extent, the US crisis was actually made by the Fed, helped by the wishful thinking of the Bush administration. One main culprit was none other than Alan Greenspan, who left the current Fed Chairman, Ben Bernanke, with a terrible situation. But Bernanke was a Fed governor in the Greenspan years, and he, too, failed to diagnose correctly the growing problems with its policies.

Today’s financial crisis has its immediate roots in 2001, amid the end of the Internet boom and the shock of the September 11 terrorist attacks. It was at that point that the Fed turned on the monetary spigots to try to combat an economic slowdown.
What was distinctive this time was that the new borrowing was concentrated in housing. It is generally true that lower interest rates spur home buying, but this time, as is now well known, commercial and investment banks created new financial mechanisms to expand housing credit to borrowers with little creditworthiness. The Fed declined to regulate these dubious practices. Virtually anyone could borrow to buy a house, with little or even no down payment, and with interest charges pushed years into the future.
What was stunning was how the Fed, under Greenspan’s leadership, stood by as the credit boom gathered steam, barreling toward a subsequent crash. There were a few naysayers, but not many in the financial sector itself. Banks were too busy collecting fees on new loans, and paying their managers outlandish bonuses.
The story is worth reading in its entirety. Unfortunately, no easy solutions are offered.

Also see:

- Sunday, April 6 at 11:49 AM: Greenspan recession probability update alert!
- Monday, April 7 at 9:11 AM: Greenspan: Don't blame me for the housing bubble

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Anonymous said...


You were prescient in your observation of the growing financial crisis. I'm starting to worry. It seems that a recession is likely. The U.S. economy is probably already in one, except maybe all of those economist's data points do not point to one. Could we be heading towards a, dare I say, ....depression?

Zeke said...

It's easy to write this column now, but where was Sachs a few years ago? He's an odd fellow with an odd record. I believe he is one of the economists most responsible for the rapid move to Capitalism in the former Soviet Union that was pretty much a disaster that made party members and mafia rich.

Perhaps it's to make up for that mistake that he's signed up for all these UN sponsored do-gooding agendas, most of which have the punch line that the "USA Should Pay our FAIR SHARE" ... usually to some basket case nation in Africa.

But the obvious truth is we are broke, and it is irresponsible to run up your credit cards when you are up to your ears in debt, even if it's to give money to the Red Cross or some other worthy cause.

Thus before we follow his current advice we need to find some much more basic old school economists to help us get our own house back in order.

I think he's a false messiah. He certainly was for Russia.

Tim said...

I'll pencil him in for now...

Zeke said...

On the other hand this fellow put out his book at the height of the Greenspan-mania (the time of his retirement).

Bubble Man: Alan Greenspan and the Missing 7 Trillion Dollars
by Peter Hartcher.

It's a good book that explains the basics of the Greenspan bubbles. Hartcher is a Austrailan journalist, not an economist though.

little larry sellers said...

As zeke pointed out, Sachs did some awful stuff in Russia, as well as Poland and Bolivia. At least he got away from the "shock therapy" nonsense over the years and has become a critic of precisely the kinds of solutions he once prescribed.

However, his articles have often been simplistic and short on solutions. It's kind of sad that Sachs qualifies as a beacon of light in economics, but then again he's competing against a bunch of people like Walter E Williams. What a living that would be, to rake in the rewards for ivory tower economic writing!

Anonymous said...

From the article: "There is still a good chance, however, that the US downturn will be limited mainly to America, where the housing boom and bust is concentrated."

Sorry, he sounds completely clueless to me. Housing busts will take down the economies in several other countries (Spain, Ireland, the United Kingdom), as well.

Walter Williams is a beacon of light (one of few who actually tells the truth).

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