Greenspan made money incredibly cheap with low interest rates for an incredibly long time. It resulted in many bubbles, most notably the tech bubble which he pricked by raising rates in the run up to the 2000 elections.
The resulting downswing was averted not by 'the great American economic machine' but by even cheaper money. Cheap money, in a system which demands large, short term, perpetual profits, will exhaust every avenue for the creation of profit in the short term... even when the method of producing that profit rips apart the system's own foundations. The axe that chopped away the supports of the system was the 'structured investment vehicle' and it's like, which have been growing exponentially since the eighties.
Basically, incredibly cheap money, the leveraging effect it has through the fractional reserve system - creating vast amounts of debt - has been responsible for almost all the growth of the western world in the past 30-35 years. It's foundation has been built on sand. Less than sand... Imaginary sand for a dream-like system.
Cheap (low interest rate) money is a massive stimulus to money supply. Money supply is inflation, ratcheted up through leverage rates of up to 50 times... that's crazy. Old style inflation measures, applied to the current situation are, frankly, frightening... and the new measures mask an enormous relative wealth transfer to the wealthy and away from middle, lower and working classes over almost 2 generations.
Effectively, inflation kills the wealth of those who live in with cash, and increases the holdings of those who have wealth. Assets.
Now do you see why the FED stopped reporting M3 (measure of total money supply) figures in 2006? ...before the, well foreseen, crash in sub prime loans. Way before the oncoming alt-a apocalypse and the jumbo loan insanity to follow, then we move into CDS and derivatives, which are even bigger markets, even more heavily leveraged... Bernanke hit the decelerator (raising rates) way too late... and now we're through the looking glass.
But the dollar is strengthening!
The current strength of the dollar is due to hedge funds and others exiting the markets. They borrowed money denominated in dollars to invest in higher risk, higher return investments denominated in non-dollar currencies. The margin calls are now in for pretty much all of those investments. Yen also. Euro as well, to a lesser degree than the yen and dollar, but the values of other currencies are falling relative to the Euro...
This is why the markets are collapsing around the world - even before the terrible results that are now being released for q3 08 in the states.
The banks want the capital increased on their margin loans, or they simply want those loans ended. Hedge funds and other funds then need to liquidate their positions (dropping markets), buy dollars (hence recent upswing in the dollar) and pay off their debt.
Other investors have also stampeded to US treasuries as a temporary safe haven - but only the shortest of short term treasuries (not even the most idiotic investor can look past the inflation problems of the dollar economy). This is, barring a series of black swans in favour of the system, the last hurrah.
The financial system and following it the entire capitalist edifice, is gone. Not just laissez faire. Everything. Gone.
Like a headless chicken, it just doesn't realise it yet.
Greenspan's "I didn't know" routine is a flat out lie. The FED and FDIC have overseers looking over bank's inner accounts and reporting in secret, permanently. It's how FDIC knows when to intervene in a bank that's about to collapse.....
Greenspan knew what he was doing as he was doing it, at least to a large degree. Perhaps he didn't know that he was going to end the system, though.
My 0.02c(euro, held outside of a bank)
-----Added 23/10/2008 at 07 : 37 : 17-----
Quote:
Originally Posted by roachboy
i think cowboy capitalism is already finished, but also that it's not yet obvious what the altered norm will look like. this transition is compounded by self-generated problems of coherence, which are a function of the american ideological monocropping practices of the past 30 years or so. you naturalize and ideology and you make it as difficult as possible to adjust to fundamental problems. the only good thing about this is its timing--in the last scene of the last act of the bush administration--if it had happened earlier, i think the political consequences of it would be far more dramatic and far worse for the united states.
that said, i still find the recanting of market fundamentalism from greenspan remarkable and the apparent inability of the press to talk about it in a language that does not repeat the problem--that is a language which is stuck inside the same ideology that is the source of this crisis---kinda fascinating.
alongside this, the banking system seems to be getting encouraged to use the "bailout" money to consolidate the system as a whole. why this is a desirable outcome, i do not know. we are far from out of the woods. the future is not at all clear. whcih is another reason this is an interesting time.
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Isn't the dogma of the free market, capitalist tom foolery reminiscent of the cold war rhetoric of freedom and democracy versus the Evil Soviets Menace? (and the soviets suffered from it as well, to be fair)
The first generation, those who devised the myth, know it's a myth. The next generation are true believers. True believers are an order of magnitude more dangerous than those who know the myth to be a myth.
I'm thinking of Eisenhower, Kennedy, Johnson and Nixon really knowing that the Soviets and assorted other 'reds' were nowhere near as great a threat as represented to the masses, but used the propaganda for their own ends. The neocons who followed them... well, they're true believers in both ends of that myth.
The more i see and read of them, the more I'm convinced... They are scheming, conniving, ruthless people with a noble goal. It's just that the noble goal is a fiction, as is/was its enemy.
I don't know if anyone else sees parallels with the free marketeers of the 70's and 80's, paired to the true believers now... I do. (possible minority of one)
The creators create a spectacle for others to live in and be controlled by, only to see their subsequent generations sucked into it, powerless.