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Alex Wong, AFP, Getty Images
It is now clear what caused the U.S.-led financial meltdown: the wrong adjectives. Federal Reserve chairman "Helicopter Ben" Bernanke, while trying to claim on Sunday that the Fed's low interest rates didn't cause the housing bubble, suggested that financial regulation should have been "better and smarter." Apparently all those decades of appeals for merely "good" and "smart" regulation were aiming too low. Meanwhile, although low interest rates didn't cause the asset bubble, next time it looks like there's a bubble forming, Mr. Bernanke said the Fed might consider hoisting rates. We don't cause bubbles here at the Fed, but if there is a bubble forming that we are not causing, we will now step in to prevent it.
Go figure.
Thus begins this decade's march of policy folly towards inevitable disaster, unless capitalism can -- yet again -- bail out lousy government policy.
One critical feature of the global crisis that is already being shoved down the memory hole is that it was rooted not in capitalist "greed" or bankers' bonuses but in Washington's manipulation of the U.S. housing market, and its promotion of securitized mortgages. Certainly, many in the financial sector appeared eager to join in the resulting highly-profitable game of musical chairs, but the music was always going to stop.
Whether the low interest rate policy of Mr. Bernanke's predecessor, Alan Greenspan, was based on trying to avoid the consequences of the internet bubble, and of 9/11, or whether-- as Mr. Greenspan subsequently claimed -- low interest rates were forced on him by mercantilist Chinese exchange rate policy and resultant Chinese investment in the U.S., either way they stimulated the crash, and had very little to do with any failure of free market capitalism.
These measures have only put off the evil day when the consequences of bad policies and poor risk analysis have to be paid. We continue to live in an age of Ponzocracy. Bernie Madoff's only error was that he was never elected to political office, although he did make sure that he became part of the regulatory process.
Almost every failed policy nostrum of the twentieth century is back in vogue, from Keynesianism to industrial strategy (whose green hue won't make it any more viable).
Canada, whether by luck or judgement, has not been as badly affected by the crisis as many countries. However, since Canada is still comprehensively yoked via trade and investment to the U.S., its neighbour's elephantine sneezes will inevitably lead to domestic fevers. Moreover, since Ottawa joined in the stimulus, bail-out and cheap money potlatch that followed, it too will have to pay a price. Bank of Canada Governor Mark Carney's commitment to low interest rates is already feeding a stock market and housing bubble.
Global regulators continue to fret about how they might prevent another crisis, even as they fail to examine their role in creating most previous ones, including the most recent. According to them, too, the problem was semantic. The reason the G20's Financial Stability Forum did not forestall, or even spot, the crisis was not just because it didn't have enough meetings going on; it had the wrong name! Not to worry, now it's the Financial Stability Board.
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