Former Federal Reserve chief Alan Greenspan now says the world faces a “once or twice in a century event”. Faith in the financial system has been called into question. Taxpayers will have to rescue more banks. Missing is any hint of apology for his role in incubating this crisis as monetary overlord for 20 years.
Where did it all go wrong? One could start by looking at the trajectory of total US debt, up from 130pc to 350pc of GDP since 1982. “We’ve had a 30-year leveraging up of America, ending in an unchecked orgy,” said Charles Dumas, from Lombard Street Research.
Mr. Greenspan argued that it was not for central banks to steer asset prices. In reality, he slashed rates to rescue banks during the Russian default/LTCM crisis in 1998. He slashed them even further after the dotcom bust. Yet he always let speculative booms run their course.
This was the “Greenspan Put”. Markets believed they could count on welfare for Wall Street in the end. The culture of moral hazard degenerated by degrees, culminating in a near-total disregard for risk by 2007.
At root, this crisis was caused by state error. Governments and economic ideologies rigged the system in favour of debt. City and Wall Street banks were pushed into behaving with reckless abandon. They took part shamelessly, of course. But their antics were merely symptoms of a deeper problem.
Needless to say, this is not the perception in North America or Europe. It already looks as if the political response will be a massive assault on the workings of the free market. Socialism is coming back. One wants to weep.
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