FacebookTwitterGoogle+RedditEmail

The Architects of Economic Disaster

by DEAN BAKER

The economies of the United States and Europe are seeing their worst downturn since the Great Depression. Tens of millions of people are unemployed or underemployed. This has led to millions losing their homes, their access to health care, and, in some cases, their lives.

Remarkably, the two individuals who bear the greatest responsibility for this disaster, former Federal Reserve Board chairman Alan Greenspan former president of theEuropean Central Bank Jean-Claude Trichet, do not appear to be suffering at all for their failure. Both are living comfortably and continue to be sought out for their expertise on economic policy. This should infuriate reasonable people everywhere.

At this point everyone should understand that the economic wreckage destroying tens of millions of lives across the globe was an entirely preventable disaster. In the case of both the United States and Europe unsustainable asset bubbles were allowed to grow to ever more dangerous levels. It was inevitable that the bubbles would burst and when they did the outcome would be a severe downturn from which it would not easy to recover.

In the case of the United States the story was a housing bubble that resulted in an unprecedented run up in house prices. After just keeping pace with inflation for a hundred years, nationwide house prices rose by more than 70 percentage points in excess of the rate of inflation over the decade from 1996 to 2006.

There was nothing in the dynamics of the supply and demand of the housing market that could have justified such an increase. Rents were going nowhere and there was a record high vacancy rate as early as 2002. More importantly the bubble was clearly driving the economy with near record rates of residential construction from 2002-2005. And housing wealth driven consumption pushed the saving rate to nearly zero from 2004-2007.

Of course these sources of demand would disappear when the bubble burst. What did Greenspan think would replace them? We may never know what Greenspan was thinking, but what he has said in his own defense is utterly absurd. In fact he told the Washington Post that he did not even know of the explosion of subprime lending until his last month as Fed chair in January 2006. If that is actually true it displays a level of incompetence that puts a drunken school bus driver to shame.

Greenspan should have been attacking the bubble with everything in his vast arsenal. Most immediately he should have been using the research of the Fed and his megaphone as Fed chair to warn the country about the bubble in unmistakable terms. (He actually did the opposite, denying the existence of a bubble and encouraging people to take out adjustable rate mortgages.) He also should have used his regulatory authority to crack down on bad mortgages. If both of these tools failed, he should have raised interest rates. This would have slowed the economy and increased unemployment, but it was better than the disaster we are seeing now.

Trichet doesn’t have any better defense. The bubbles in the peripheral countries were leading to trade imbalances that were clearly unsustainable. As early as 2004 the current account deficit in Spain was already 5.2% of GDP, in Greece it was 5.8% of GDP and in Portugal it was 8.3% of GDP. These deficits peaked in 2007-2008 at 10% of GDP or higher. How did Trichet think that deficits of this size would resolve themselves in a single currency? What was the process whereby the peripheral countries would suddenly be able to pay for their imports from the core countries? If he envisioned some mechanism for this adjustment that didn’t involve an economic earthquake, it is difficult to imagine what it could have been.

European Central Bank officials are prone to say in their own defense that their mandate is only to target 2% inflation; it doesn’t say anything about preventing depressions. Interestingly the ECB did not take this narrow view of its mandate when the euro zone’s largest banks faced insolvency in the fall of 2008. It came through with trillions of euros of below market loans.

The reality is that a central bank has to be responsible for maintaining economic stability as the ECB has implicitly acknowledged with its actions since the onset of the crisis. This means the ECB has no more excuse for failing to stem the imbalances of the last decade than does the Fed.

This raises the question of why the public should be paying for the generous pensions that both Greenspan and Trichet enjoy. After all, if Greenspan and Trichet had tried to burn down their respective institutions would we be paying their pensions? Given the consequences of their policy failures, we would be much better off if they had done their done their jobs competently and our only complaint was an incident of arson.

Economists believe that it is important that workers be given incentive for good work and punished for bad work. It would be hard to imagine central bankers more in need of punishment than Greenspan and Trichet. If we don’t take action against these two, why would we expect that their successors will be any better?

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy and False Profits: Recoverying From the Bubble Economy.

This article originally appeared on The Guardian.

Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.

More articles by:
Weekend Edition
July 22, 2016
Friday - Sunday
Jeffrey St. Clair
Good as Goldman: Hillary and Wall Street
Joseph E. Lowndes
From Silent Majority to White-Hot Rage: Observations from Cleveland
Paul Street
Political Correctness: Handle with Care
Richard Moser
Actions Express Priorities: 40 Years of Failed Lesser Evil Voting
Eric Draitser
Hillary and Tim Kaine: a Match Made on Wall Street
Conn Hallinan
The Big Boom: Nukes And NATO
Ron Jacobs
Exacerbate the Split in the Ruling Class
Jill Stein
After US Airstrikes Kill 73 in Syria, It’s Time to End Military Assaults that Breed Terrorism
Jack Rasmus
Trump, Trade and Working Class Discontent
John Feffer
Could a Military Coup Happen Here?
Jeffrey St. Clair
Late Night, Wine-Soaked Thoughts on Trump’s Jeremiad
Andrew Levine
Vice Presidents: What Are They Good For?
Michael Lukas
Law, Order, and the Disciplining of Black Bodies at the Republican National Convention
Victor Grossman
Horror News, This Time From Munich
Margaret Kimberley
Gavin Long’s Last Words
Mark Weisbrot
Confidence and the Degradation of Brazil
Brian Cloughley
Boris Johnson: Britain’s Lying Buffoon
Lawrence Reichard
A Global Crossroad
Kevin Schwartz
Beyond 28 Pages: Saudi Arabia and the West
Charles Pierson
The Courage of Kalyn Chapman James
Michael Brenner
Terrorism Redux
Bruce Lerro
Being Inconvenienced While Minding My Own Business: Liberals and the Social Contract Theory of Violence
Mark Dunbar
The Politics of Jeremy Corbyn
David Swanson
Top 10 Reasons Why It’s Just Fine for U.S. to Blow Up Children
Binoy Kampmark
Laura Ingraham and Trumpism
Uri Avnery
The Great Rift
Nicholas Buccola
What’s the Matter with What Ted Said?
Aidan O'Brien
Thank Allah for Western Democracy, Despondency and Defeat
Joseph Natoli
The Politics of Crazy and Stupid
Sher Ali Khan
Empirocracy
Nauman Sadiq
A House Divided: Turkey’s Failed Coup Plot
Franklin Lamb
A Roadmap for Lebanon to Grant Civil Rights for Palestinian Refugees in Lebanon
Colin Todhunter
Power and the Bomb: Conducting International Relations with the Threat of Mass Murder
Michael Barker
UK Labour’s Rightwing Select Corporate Lobbyist to Oppose Jeremy Corbyn
Graham Peebles
Brexit, Trump and Lots of Anger
Anhvinh Doanvo
Civilian Deaths, Iraq, Syria, ISIS and Drones
Christopher Brauchli
Kansas and the Phantom Voters
Peter Lee
Gavin Long’s Manifesto and the Politics of “Terrorism”
Missy Comley Beattie
An Alarmingly Ignorant Fuck
Robert Koehler
Volatile America
Adam Vogal
Why Black Lives Matter To Me
Raouf Halaby
It Is Not Plagiarism, Y’all
Rivera Sun
Nonviolent History: South Africa’s Port Elizabeth Boycott
Rev. Jeff Hood
Deliver Us From Babel
Frances Madeson
Juvenile Life Without Parole, Captured in ‘Natural Life’
FacebookTwitterGoogle+RedditEmail