Tuesday, May 12, 2009

"Mea Culpa, Mea Culpa"

The Wall Street Journal reports that, in an interview with Charlie Rose, Treasury Secretary Timothy Geithner has acknowledged the responsibility of the Federal Reserve for the economic crisis.
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."

Geithner goes on to try to push responsibility back onto bankers for taking undue risks, but bankers were acting on the signals put out by the government. The government was holding interest rates low, encouraging (and even coercing) banks to make risky housing loans, and guaranteeing mortgage investments, all of which served to inflate the price of new housing on what looked like a perpetually increasing curve. What were the risks that the banks should have seen? That statism doesn't work? That government-created bubbles always end in government-created busts? If that is the risk that Wall Street should have recognized, then let Washington recognize it now and get their hands off the economy.

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