Wednesday, February 18, 2009

Marc Faber: Fed Caused the Recession

My own opinion is that the current crisis was caused by a perfect storm of public policy, loose money, financial innovation, globalization, and good old-fashioned unbridled greed. And when I say unbridled greed, I mean the willingness of many individuals to take actions they knew were dubious because they were blinded by a quick buck and the fact that "everybody was doing iot."

Still, in today's WSJ, Marc Faber makes a fairly compelling case that the original sin in all this was the Fed's choice to keep interest rates relatively low PLUS insist there was no asset price inflation as a result:

"But because interest rates during this time continuously lagged behind nominal GDP growth as well as cost of living increases, the Fed never truly implemented tight monetary policies. Indeed, total credit increased in the U.S. from an annual growth rate of 7% in the June 2004 quarter to over 16% in early 2007. It grew five-times faster than nominal GDP between 2001 and 2007.

The complete mispricing of money, combined with a cornucopia of financial innovations, led to the housing boom and allowed buyers to purchase homes with no down payments and homeowners to refinance their existing mortgages. A consumption boom followed, which was not accompanied by equal industrial production and capital spending increases. Consequently the U.S. trade and current-account deficit expanded -- the latter from 2% of GDP in 1998 to 7% in 2006, thus feeding the world with approximately $800 billion in excess liquidity that year."

The whole article is here.

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