The crisis: a modest proposal
19 September 2008
Writing in today’s FT David Blake makes a devastating attack on Former Federal Reserve Chairman Alan Greenspan. Blake argues that Greenspan knew about the growing risks of the dot com bubble and the factors that led to the credit crunch but in both cases refused to act and has since sought to wash his hands of responsibility. Blake is surely right that Greenspan’s formerly sky high reputation deserves to come down to earth. But let’s also understand how hard it is to act when contagious greed sweeps the markets.
In particular, imagine the outcry had Governments in either the US or the UK sought to stop sub prime lending or 100% plus mortgages. ‘We want to borrow’, ‘the banks want to lend’ and ‘why shouldn’t we be allowed to get our share of the housing boom’ would have been the loud and angry public response. Government could have been portrayed as both interfering and a block on aspiration. To have done this when City experts were dismissive of any warning voices would have made it even harder.
Two characteristics of bubbles are that the later you get involved the more you lose and that the late comers are usually those with the least to fall back on once things go wrong. This will happen again.
Greater regulation will stop a bubble just like this one reoccurring but bubbles are endemic to the City’s casino economy. New regulation will simply provide the contours for the excesses of the future. So as well as regulation to stop problems we need to boost the legitimacy of those who cry ‘danger’.
I propose the establishment - maybe by the OECD or IMF - of an international panel of wise people. This group would be asked to comment every six months on major trends in world markets using a traffic lights system. If the panel flags up an amber danger in the global market or in one major country it can demand the Government of that country responds to its concerns. If the light turns red the Government in question can be required to attend a special public hearing to answer the concerns being raised by the panel.
One of the most difficult to bear facts about the current crisis is that people saw it coming. Warren Buffet and George Soros were only the most prominent Cassandras. Had such a panel existed and had it included people like Buffet and Soros these is no question that it would have been flashing red lights about both irresponsible lending and complex derivatives years ago. Maybe we would all still have plunged headline into disaster. At least we couldn’t have said we weren’t warned.
In particular, imagine the outcry had Governments in either the US or the UK sought to stop sub prime lending or 100% plus mortgages. ‘We want to borrow’, ‘the banks want to lend’ and ‘why shouldn’t we be allowed to get our share of the housing boom’ would have been the loud and angry public response. Government could have been portrayed as both interfering and a block on aspiration. To have done this when City experts were dismissive of any warning voices would have made it even harder.
Two characteristics of bubbles are that the later you get involved the more you lose and that the late comers are usually those with the least to fall back on once things go wrong. This will happen again.
Greater regulation will stop a bubble just like this one reoccurring but bubbles are endemic to the City’s casino economy. New regulation will simply provide the contours for the excesses of the future. So as well as regulation to stop problems we need to boost the legitimacy of those who cry ‘danger’.
I propose the establishment - maybe by the OECD or IMF - of an international panel of wise people. This group would be asked to comment every six months on major trends in world markets using a traffic lights system. If the panel flags up an amber danger in the global market or in one major country it can demand the Government of that country responds to its concerns. If the light turns red the Government in question can be required to attend a special public hearing to answer the concerns being raised by the panel.
One of the most difficult to bear facts about the current crisis is that people saw it coming. Warren Buffet and George Soros were only the most prominent Cassandras. Had such a panel existed and had it included people like Buffet and Soros these is no question that it would have been flashing red lights about both irresponsible lending and complex derivatives years ago. Maybe we would all still have plunged headline into disaster. At least we couldn’t have said we weren’t warned.
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