Tim Geithner confirms what Austrian School economists have been blowing the whistle about all along:
Mr. Geithner: “But I would say there were three types of broad errors of policy and policy both here and around the world. One was that monetary policy around the world was too loose too long. And that created this just huge boom in asset prices, money chasing risk. People trying to get a higher return. That was just overwhelmingly powerful.”
Mr. Rose: “It was too easy.”
Mr. Geithner: “It was too easy, yes. In some ways less so here in the United States, but it was true globally. Real interest rates were very low for a long period of time.”
Mr. Rose: “Now, that’s an observation. The mistake was that monetary policy was not by the Fed, was not . . .”
Mr. Geithner: “Globally is what matters.”
Mr. Rose: “By central bankers around the world.”
Mr. Geithner: “Remember as the Fed started — the Fed started tightening earlier, but our long rates in the United States started to come down — even were coming down even as the Fed was tightening over that period of time, and partly because monetary policy around the world was too loose, and that kind of overwhelmed the efforts of the Fed to initially tighten. Now, but you know, we all bear a responsibility for that. I’m not trying to put it on the world.”
And I fully concur with this conclusion that follows in this WSJ article:
The Washington crowd has tried to place all of the blame for the panic on bankers, the better to absolve themselves. But as Mr. Geithner notes, Fed policy flooded the world with dollars that created a boom in asset prices and inspired the credit mania. Bankers made mistakes, but in part they were responding rationally to the subsidy for credit created by central bankers.
Another former Treasury official just confirmed the same:
The Fed helped to trigger the current financial crisis by keeping rates too low for too long, Taylor said.
“Low interest rates led to the acceleration of the housing boom,” he said. “The boom then resulted in the bust, with delinquencies, foreclosures and toxic assets on the balance sheet of financial institutions in the United States and other countries.”
Taylor said that though policy makers were well intended, they were mistaken in trying to “fine-tune” the economy after about a quarter of a century during which long and deep recessions had been avoided.
For more details see Credit Expansion Policy … always a good read for anyone who wants to understand the root cause of the financial crisis. Back in October 07 I concluded that article with:
As long as the central banks keep pursuing this policy, there is no need to be surprised when the next credit crunch occurs. Neither is there any need to be surprised about the fact that all countermeasures taken by the government will turn out to be utter failures that will accomplish nothing but aggravate the crisis. For if the cause of the problem has been too much government intervention, then more government intervention will only add to it.