In Ben’s big speech the other day, he said that it wasn’t the Fed’s fault, and that only 5% of the problem was caused by Greenspan dropping the base rate. [1]
Everyone is saying:
“Oh what a jerk, he’s just covering up, and trying to shift the Fed’s share of the blame”.
Well I can understand the anger, but I’m sorry to break it to you folks, but you are throwing rotten eggs (and tomatoes) at the right people, for the wrong reasons.
Not that I have any objection to that (there are plenty of good reasons to throw rotten tomatoes and rotten eggs at the Fed (and Ben Bernanke); just this isn’t one of them.
It’s a controversial subject, so let me break it down:
1: Everyone agrees (I think) that the cause of the Credit Crunch was Americans borrowing money (to a great extent collateralized by their houses), and then finding out that they could not (or would not) pay the money (plus the interest) back.
2: The main reason they could not (would not) was because the value of the collateral that they had put up to guarantee the loans they had taken out turned out to be a lot less than they (and the people who had lent them money), thought it would be worth when they borrowed the money.
3: So they didn’t pay the money back, so then the people who had lent the money got stuck with the collateral, that didn’t cover the loans they had made, and so they couldn’t pay money back to people they had borrowed it from, and so there was a credit crunch.
4: So the Fed (along with the Treasury) stepped in and lent, gave, and in some cases invested money in the banks to tide them over, a lot of money (and where they got it from is still a subject of intense speculation – but that’s another story).
5. Even so the banks stopped lending and everyone ran out of cash, unemployment went up; that made the problem worse. Plus some morons had written insurance betting that the people who had borrowed the money would pay it back, and then when the “policies” got called they couldn’t pay up, that made the whole thing even worse.
And here we are.
The Legend of the Evil Fed!
The popular…
