It is sobering to reflect that one of the best ways to get yourself a reputation as a dangerous citizen these days is to go about repeating the very phrases which our founding fathers used in the struggle for independence. - Charles A. Beard
Some Thoughts on the 2008 Crash
By Vedran Vuk
Don’t Forget Business Cycles
Dear Reader,
At the onset of the financial crisis, many commentators predicted the end of capitalism. With free markets still around in a weakened form, the predictions were a little too bold. Sure, things are a lot worse, but the expected swing toward socialism didn’t go all the way. However, some intellectual ideas did die in the crash. Most importantly, any structure of a macroeconomic worldview has fallen apart –primarily in the media.
What do I mean? Previously, booms and busts were understood to be the phenomenon of business cycles. Despite conflicting theories from various schools of thought, economists recognized the presence of repeated business cycles. But today the business cycle seems all but forgotten in the press. Anything and everything is blamed for the crash other than business cycles. The accusations range from risk-taking on Wall Street to excessive bonuses, to regulations. Some of the favorite ones include the Community Reinvestment Act and the repeal of the Glass-Steagall Act.
And of course, these regulations had a role to play, but the Federal Reserve played the leading part. With a short look back at history, the other explanations fail to account for previous booms and busts. Did the Community Reinvestment Act and Financial Services Modernization Act cause the dot-com bubble? What about the recession in 1991? And there are many more recessions throughout history; new regulations cannot possibly explain everything.
Well, what about the subprime mortgages? Certainly those caused the crash. Yes and no. This time it was subprime mortgages, last time it was tech, and next time it’ll be something else. Ultimately, an extended period of low interest rates led to the crisis. Too much credit in the market gave entrepreneurs and companies the illusion of real prosperity. Businesses engaged in projects expecting sustained prosperity. In the case of housing, the demand seemed strong and endless. But unfortunately, it was only driven by the low cost of borrowing – not real wealth in society. When interest rates began to rise, the artificial wealth contracted. Projects that were built on the expectation of ever-increasing wealth suddenly went bust, and the entire economy experienced a massive contraction.
The same scenario has happened time and time again. Regulations, mortgages, and excessive risk-taking are just minor details in the big picture of the business cycle. Every crash has its own set of characters and problems, but they’re not the real causes of the bust.
At the beginning of the Obama administration’s term in office, the Left often blamed the crisis on “the policies of the last eight years.” This always makes me think, “Well, what policies specifically?” Even the items mentioned in the intro didn’t start in the last administration. The Financial Services Modernization Act that got rid of Glass-Steagall was passed in 1999. The CRA wasn’t exactly a Republican agenda either. Also, don’t forget that Fannie and Freddie were busy and empowered throughout the ‘90s.
Then there are the low interest rates. But this was a policy of the Federal Reserve and not the Bush administration. Also, the Democrats can’t possibly mean low rates since today’s rates are even lower. The “last eight years of policy” quote shows how ignorant the Democrats really are about business cycles. It’s essentially like saying “Some stuff from the past eight years caused this, but we’re really not sure what the actual problem is.” As a result, they blame bonuses, proprietary trading, a sudden burst of greed, or some other mumbo-jumbo that has nothing to do with the business cycle.
THE OBUMMER AND THE GOVERNMENT SAYS THERE IS NO INFLATION...
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