Steve Forbes: Why the financial crisis of 2008 could be repeated
As noted by Steve Forbes, editor in chief of magazine Forbes, few people paid attention to decade’s financial crisis. However, almost all ignore its root cause — a weak dollar. Soft, unstable currency always generates economic crises. According to Forbes, if we will not learn this fundamental lesson, in the future we inevitably expect new challenges.
In his article, Forbes offers a retrospective of the three biggest blunders of the US government, which in 2008 led to the great recession.
The pressure of the dollar. Due to the bursting of the tech bubble in 2000, the economy weakened, and in 2001 entered into a formal recession. In response, the Federal reserve began to lower interest rates. Then she and the Ministry of Finance (which by law is responsible for the dollar) began to undermine the value of the national currency.
It was a catastrophic mistake. The idea behind this step was that the gradual devaluation of the dollar will increase exports and help stimulate the economy. But it didn’t make sense: countries with unstable currencies always (over time) significantly lagged behind countries with a healthy currency. At least compare Switzerland, which in the last 100 years were the best managed currency, with Argentina, which was one of the worst national currencies. Switzerland achieved impressive results, can not be said about Argentina, although it was once a global economic power.
The reason for this dramatic divergence is simple. Progress depends on investment, and investment brings the results when the value of money stable, as well as the markets are much more efficient and productive when there is a fixed cost of goods.
“Wrappers” are distorting prices, which are extremely important in the information pipeline of supply and demand. The latter in turn enable the function of the free market. Like a virus in the computer, the distortion of the currency distorts the information. When the dollar gradually subsided, the commodity prices soared. Oil jumped from $20— 25 per barrel to $100. Gold soared from $300 an ounce to $1900. When money becomes unreliable, people turn to hard assets. The most dramatic and devastating example of this process happened in the housing market. In varying degrees, other currencies followed the bad example of the dollar. Thus, the artificial inflation of the housing market has become a worldwide event.
Inconsistencies in Washington led to a paralysis in the financial market. The miscalculation turned into a panic that nearly brought the financial system to catastrophic heart failure. In spring 2008, the fifth largest investment Bank on wall street collapsed under the weight of “bad” mortgages and other dubious assets. Bear Stearns was hardly an important link in the system, but the Bush administration decided to rescue its creditors. Politically powerful and reckless government-controlled enterprises Fannie Mae and Freddie Mac, were filled with subprime mortgages. Washington came to their aid. And at the same time, he allowed Lehman Brothers, a much larger and more important link than Bear Stearns, to go to the bottom. The government said: no more. So, the first one ever produced money markets became overly aggressive and suffered heavy losses. Simultaneously, AIG, the world’s largest commercial insurance company, needed an enormous injection of funds.
The panic was growing, when all began in despair to pick up the money. Washington again decided to provide a Federal guarantee for the salvation of the chosen banks. Citigroup and AIG were essentially nationalized.
Accounting has become a weapon of mass destruction. In 2007, regulators revived an accounting standard called “accounting in current prices” (mark— to— market accounting). The essence of this rule, abolished during the great depression, to continue to suppress the value of the Bank capital in case companies are in an unstable state.
The Bush administration stubbornly ignored the seriousness of this decree. Finally, in early March 2009 through the efforts of several knowledgeable people, the House of representatives held a hearing during which it was clearly marked: the rule should be abolished. Regulators got the message and reversed the destructive decree, which threatened the very existence of the banking system of the United States. This put an end to the terrible “bear” market, which spent the middle joint funds almost 60%. The ensuing bull market continues to this day.
This whole sorry episode confirms underappreciated truism: government, not free markets lead to economic disasters.