I really like the way Michale Hirsh, author of Capital Offense: How Washington’s Wise Men Turned America’s Future Over to Wall Street, describes the causes of the crisis:

A now infamous 1999 Time magazine cover featured Alan Greenspan (then chairman of the Federal Reserve), Robert E. Rubin (then Treasury Secretary) and Lawrence H. Summers (then deputy Treasury secretary) as “The Committee to Save the World.” The three men, the magazine declared, had steered America through the perilous shoals of highly volatile world markets. The United States economy remained “astonishingly robust” and, by protecting American growth, the three had made “investors deliriously, perhaps delusionally, happy in the process.”

A decade later, in the wake of America’s 2008 fiscal meltdown, the thinking of Time’s “Three Marketeers” and their colleagues in Washington and on Wall Street would be cited as a major cause of that crisis. Mr. Greenspan has been chastised for keeping interest rates too low for too long, for failing to see the danger of subprime mortgages and falling house prices, and for neglecting to use the Fed’s regulatory clout to restrain the excesses in the market. Mr. Rubin has been taken to task for promoting the repeal of the Glass-Steagall Act, which was passed during the Great Depression and prohibited commercial banks from engaging in the investment business. And Mr. Summers has been criticized for failing to foresee the risks derivatives posed and for his reluctance to regulate these exotic financial instruments.

In fact, the main reason the financial crisis of 2008 occurred, the journalist Michael Hirsh argues in his provocative new book, “Capital Offense,” is that “the people in charge of our economy, otherwise intelligent and capable men like Greenspan, Rubin and Summers — and later Hank Paulson and Tim Geithner — permitted themselves to believe, in the face of a rising tide of contrary evidence, that markets are for the most part efficient and work well on their own.”

-Michiko Kakutani, NYT

I came to the same conclusion when tracing the origins of this crisis to the men who radically deregulated the markets in Bailout Nation.

Hirsh puts the prior history of regualtion and deregulation into broader context. Its really about whtehr you believe Human Beings are rational or irrational:

“In these pages Mr. Hirsh looks at how the ideas of John Maynard Keynes — predicated upon the belief that markets do not automatically self-correct, and that government intervention is sometimes necessary — were embraced in Washington in the wake of the Great Depression. He chronicles how the opposing ideas of Milton Friedman — who believed that free markets functioned efficiently without bureaucratic interference — gained ascendancy with the election of Ronald Reagan and the abrupt collapse of the Soviet Union. And he charts how the deregulation movement accelerated during the administrations of Bill Clinton and George W. Bush, arguing that it created an “indomitable zeitgeist” that would set the stage for disaster.

Regarding the differences between advocates of government intervention and those who contend that free markets operate better on their own, Mr. Hirsh says that such arguments, boiled down, are “largely about the issue of human rationality versus irrationality. One side holds that markets are basically rational and efficient on their own — that they are an optimal way for societies to allocate resources — and governments only interfere. The other side holds that markets and the people who make them up often behave irrationally, inefficiently and unjustly, and therefore the best course is to keep government involved at all times.” (emphasis added)

I am going to have to add this one to my credit crisis book queue . . .

Category: Bailout Nation, Bailouts, Books, Regulation

Fed Ownership of the U.S Treasury Curve

The Global Macro Monitor blog was started b an independent trader and economist and, in a prior life, was a global macro hedge fund PM/trader, headed emerging market bond trading desks on Wall Street, and an economist/global strategist, beginning his career at the World Bank in the mid 1980’s. His unique and unconventional views are…Read More

Category: Think Tank

Value Line Arithmetic vs Geometric Index

My pal David Rosenberg points out that the Value Line Arithmetic Composite Index is at an ALL TIME HIGH. (This is an equal weighted price index of the 1650 stocks surveyed by Value Line, averaged daily). Dave writes: “The average stock, by the way, according to the Arithmetic Value line index, just hit a new…Read More

Category: Index/ETFs, Markets

Nothingman

Dan Greenhaus is at the Equity Strategy Group at Miller Tabak + Co. where he covers markets and portfolio theory. He has contributed several chapters to Investing From the Top Down: A Macro Approach to Capital Markets (by Anthony Crescenzi). This is his most recent commentary: ~~~ The FOMC meets today for the final time…Read More

Category: Federal Reserve, Think Tank

NFIB: Modest Improvement and Correlation du jour

The National Federation of Independent Business (NFIB) released its Small Business Economic Trends Report (SBET) [.pdf], and the news was an improvement over the prior month: The National Federation of Independent Business Index of Small Business Optimism rose 1.5 points in November rising to 93.2, the highest reading since December 2007, and the fourth consecutive…Read More

Category: Consumer Spending, Cycles, Data Analysis, Economy, Employment

All the news fit to email

Since the last FOMC meeting on Nov 3rd, interest rates have gone higher (6 mo high in 10 yr yield, 7 mo high in mortgage rates), some Congressional members want to end the Fed’s dual mandate, Ron Paul was named Chairman of the Domestic Monetary Policy subcommittee that will oversee the Fed, they’ve heard criticism…Read More

Category: MacroNotes

Where’s the Note? Leads BAC to Ding Credit Score

Let’s imagine the following scenario: You have a Jumbo mortgage with Bank of America. You are a good customer, do your banking with BofA, and you have never missed a payment. In fact, you always send your mortgage in on time. But this fraudclosure mess has you curious. You wonder who actually holds your note,…Read More

Category: Credit, Legal, Regulation

24 (Television series)

I have never seen a single episode of 24. Amazon has 24: The Complete Series on sale for $139 . . . I am seriously tempted to order it for the holidays.

Category: Television, Weekend

Foreclosure Tax Breaks Hurting Florida Cities/Counties

Here is the latest oddity out of Florida: Homestead-exemption tax break, intended for resident homeowners who actually live in their Florida homes, is instead accruing to the banks that are repossessing homes via foreclosure. The Orlando Sentinel has the details: Local governments across the state are losing revenue because banks are getting the homestead-exemption tax…Read More

Category: Foreclosures, Real Estate, Really, really bad calls, Taxes and Policy

WikiLeaks Documentary

Be sure to check out WikiRebels – The Documentary. It is a rough-cut of the first in-depth documentary on WikiLeaks and the people behind it. Swedish Television reporters Jesper Huor and Bosse Lindquist investigate.

Category: Film