Wisdom Beat

Eclectic wisdom research

Wisdom for a punch-drunk Wall Street

Review by John Plender.

Henry Kaufman, the economist and Wall Street elder statesman, gives the lie to the notion that no one saw the financial crisis coming. He was not alone, but was earlier than most, in seeing the structural flaws in the financial system and in central bank thinking that led to the debacle of the past two years.

In his latest book, Kaufman once again aligns himself with those who believe that a vital task of the central bank is to take away the punchbowl just as the party gets going. That view went out of fashion with Alan Greenspan, a free-market enthusiast who argued, while chairman of the Federal Reserve, that it was difficult to identify credit bubbles, dangerous anyway to pop them and best simply to clear up afterwards.

We now know the cost of this libertarian approach to monetary policy. As Mr Kaufman argues, moreover, that the approach was inconsistent. The Fed tended to be hands-off in the upturn but super-active in loosening policy and rescuing overextended financial institutions when asset prices collapsed. This morally hazardous double standard was a recipe for ever greater risk taking. It also helps to explain the extraordinary build-up of US household debt since the 1980s and the current threat of deflation.”

Read the article.

September 1, 2009 - Posted by | Wisdom Blog posts

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