When a government policy maker is questioned about it, this seems to be the excuse most common to the causes of the recent economic crisis. I have argued here that the Community Reinvestment Act, Bush’s focus on easy home ownership and the push from the Congressional banking committees helmed by Barney Frank and Chris Dodd to make that ownership “equal” were responsible – remember, it’s not fair that everybody can’t afford a $500,000 house just because they can’t pay for it, right?
Well perhaps I was just limited in my thinking because economist Brian Domitrovic, writing in today’s Forbes says it was the weak dollar that caused it all.
A relationship becomes clear. Cause: comprehensive devaluing of the dollar on the part of its masters in the government. Effect: major investment shifting into hard assets corresponding to fear for the dollar’s soundness.
Again, we have covered up all the activities that occurred after the crisis started in 2008, because these activities have no logical claim to be viable tools of diagnosis into what had come before they even existed.
In this light, the exposure in 2008 of the financial sector to currency-hedge instruments, especially to those in land, is clearly but a symptom of the root cause. As the flight from the dollar proceeded from 2003 to 2008, the financial sector was prevailed upon to provide products and insurance commensurate with the major development.
This it did. To mistake credit default swaps, subprime mortgages, easy loan approvals, and all the rest with the fundaments of the crisis is to fail to ask why markets for these things suddenly materialized out of nowhere from 2003 to 2008. It would be news if these things had developed outside of major dollar devaluation. But since they in fact developed in the face of major dollar devaluation, the real story cannot be the financial sector’s accommodation of the new dollar weakness, but rather the fact and origins of that weakness itself.
Surely one of the reasons that public officials have been keen to scattershot blame for the crisis across the real sector is cover. The government in its role of guarantor of the currency caused this crisis, and the crisis turned out to be a major one. So we hear from public officials that it was lack of regulation, the rise of income inequality, Ronald Reagan’s tax cuts of thirty years ago (!) that cased the crisis, in that these things either put the cause of the crisis in the ex-governmental portion of the economy or find government’s culpability in the ancient past. One of the reasons we got Dodd-Frank is to help make the rhetorical case that government was not responsible for this crisis.
Real leadership requires calling things as they are and taking responsibility for past actions. In this election year, and as our great economy still only pokes along, it is time to get serious and admit that the major economic arms of the federal government, the Federal Reserve and the Treasury, mismanaged the currency, and concede that because of it the nation had to endure not only the mildness of the 2003-07 boom, but the brutal Great Recession as well.
Domitrovic does make a couple of points that I have posted here:
- Businesses do not exist to lose money, so they adjust to policies so that they can make money.
- Since they don’t desire to operate a a loss, they will not invest in markets unless they have a way to cash out.
The weak dollar may have burst the bubble but because governmental policy created a market for risky paper at Fannie and Freddie and those same policies of mandated purchase of those bad assets by those two entities guaranteed a path to pass the risk along, the financial sector realized that the smart money was in originating loans and then selling the paper to Fannie and Freddie, thereby effectively passing the risk to the taxpayer.
How do you make more money in this scenario?
Originate and sell even more crappy paper. Make the politburo bosses happy. Inflate the balloon.
So we are in complete agreement with this statement:
The government in its role of guarantor of the currency caused this crisis, and the crisis turned out to be a major one.