John Allison head of American bank was witness to the decisions of government, Federal Reserve leaders and banking CEO’s that led to a huge speculative bubble and the collapse of the financial system, including Fannie and Freddie, virtually the entire cartel of big banks and brokers and major companies. Allison looks at subsidized bailouts with gimlet eye, focusing on a reckless, insolvent, privileged financial oligarchy—subsidized by a feckless Fed, a dilatory Treasury and a politicized FDIC. He also tells us “the vast majority of the explanation for the crises… presented in the popular press are not true.
The only way there could have been a bubble in the residential real estate market was if the federal reserve created too much money. It would have been mathematically impossible for a misinvestment of this scale to have happened without the monetary policies of the Fed.
The press ignored Allison’s interpretation of the crisis since the Fed is a totem of the economic, journalistic and intellectual elite. Greenspan “created a structure of negative real interest rates”, forcing down rates to 1%, encouraging and providing incentives to banks and borrowers to buy and sell poisoned products and to take on vast amounts of shaky debt and leverage which could not be sustained if higher real interest rates returned. Bernanke rapidly raised interest rates and created an inverted yield curve, higher short-term rates than the high long-term rates.
Remember that Americans had borrowed and leveraged themselves during the period in which Greenspan forced the federal funds rate down to 1%, giving rise to sub prime homebuyers who were publicly encouraged by Greenspan to take on low-rate “interest only” mortgages.
Bernanke “held the inverted yield curve for more than a year (7/06-1/08) one of the longest yield curves inversion ever. And inverted yield curves historically lead to recession. Allison, the Fed was both the fundamental cause of the real estate bubble and the agent of its collapse. But Bernanke was adamant that there would not be a recession.
Allison conclusion in my career the fed has a 100% error rate in predicting and reacting to important economic turns, is trying to arbitrarily set the single most important price in the economy the price of money.
Allison has a solution for the distortions, subsidies and money-printing exercises of the Fed, he is an advocate of the policies of the late Austrian economist Ludwig von Mises who is an advocate of a purer free market, through which we can reform our overregulated economy. Allison’s proposal is a “private banking system” free of Fed manipulation and incompetent regulation. It operates on a market-selected monetary standard which would probably be gold, and that monetary standard must be a reliable and trusted standard of measurement. The standard namely the dollar, should be expressed as a defined weight-unit of gold and institutionally associated with a private banking system. These free market institutional arrangements would be reinforced by effective bankruptcy laws and by laws strictly enforced against force and fraud.
Our educational system, especially our “elite” universities played a far more significant role in the destruction of wealth that greed on Wall Street did. The ideas that these elite universities are currently teaching our future leaders pose a fundamental threat to our long term prosperity.
Source—weekly standard, lewis lehrman