I am still getting caught up after missing yesterday’s trading, but I thought I would take this opportunity to talk about something a little longer term in nature.
In the aftermath of the 2008/9 credit crisis many tried to make sense of how the US economy could have collapsed so dramatically. There were a whole host of different theories put forward, assigning blame to wide array of different parties.
Most acknowledge that excessive leverage in the housing credit sector was the main culprit. But who was responsible for allowing this excessive speculative borrowing is by no means clear.
Whereas most Canadians’ dinner debates revolve around which hockey player was truly the greatest to ever lace up (Orr, Gretzky or Crosby?), the MacroTourist often finds himself discussing the nuances of macro economic polices with his father. The old man is no slouch when it comes to debating the finer points of macro economic policy, but there is one point where we firmly disagree.
He is convinced that the 2008/9 credit problems were mainly the result of lax oversight. He reluctantly admits that the speculative bubble was made all the worse with the loose monetary policy, but at its heart, the problem was that regulators failed to stop the excessive leverage that was obviously fraudulent.
I take another view. I feel that he is mixing up cause and effect. The real problem was the excessively easy monetary policy. When you price money too cheaply, people find ways to speculate with it. Like a river that is overflowing its banks, the extra money is going to flow into something. If it wasn’t real estate, it was going to be something else.
There is no doubt it was made worse by the lax oversight, but that wasn’t the cause of the crisis, it was the symptom.
After the real estate bubble burst, many pundits were saying that Greenspan and Bernanke left rates too low for too long, making the problem all the worse. I distinctly remember many strategists forecasting that on other side of the trough, the Fed was going to be much more aggressive with rate hikes to ensure this never happened again.
How quickly everyone forgets.
Remember Obama’s 2009 speech about the problems with the financial system:
“I want everybody here to hear my words: We will not go back to the days of reckless behavior and unchecked excess that was at the heart of this crisis, where too many were motivated only by the appetite for quick kills and bloated bonuses.”
Here we are in 2014 with absolutely nothing having changed.
And so my father and I are faced with a unique opportunity to settle our dinner table debate in real time.
I contend that no amount of regulation is going to stop the next bubble. If you price money at zero, stupid things will happen with it. It is too difficult to determine where the excesses are occurring and they will only be obvious in hindsight. Right now as we speak, the seeds of the next 2008/9 credit crisis are being sown.
All this talk about not repeating the same mistake was nothing more than talk. The same policies are being followed and we can expect the same results. In fact, given the magnitude of the monetary stimulus, I expect the bubble to be even bigger than ever.