Extraordinary admission

May 7th, 2009

Last night on Charlie Rose, Treasury Secretary Tim Geithner made an extraordinary admission. Here’s the exchange:

Rose: “Looking back, what are the mistakes, and what should you have done more of? Where were your instincts right but you didn’t go far enough?”

Geithner: “There were three broad types of errors in policy. One was that monetary policy here and around the world was too loose for too long.  And, that created just this huge boom in asset prices; money chasing risk; people trying to get a higher return; that was just overwhelmingly powerful.” 

Rose: “Money was too easy.”

Geithner: “Money was too easy, yeah . . . . Real interest rates were very low for a long period of time . . . .”

There you have it. Pretty simple. And yet it is the first time I can recall that any U.S. executive branch official, spanning the Bush and Obama Administrations, has admitted monetary policy was even one factor, let alone the central factor, leading to the crash. This is very big stuff.

Some of us have been saying this for years, and even warned of the potentially severe consequences as the monetary errors were building. Few predicted the exact course of extraordinary events over the last 18 months, but it was clear to me in August 2006 the size of the monetary mistakes would have big repercussions:

It is these periods of transition, where the value of the currency is changing fast, but before price changes filter through all commerce and contracts, when financial and political disruptions often take place.

So Geithner, who’s had some rocky moments, gets real credit for admitting a crucial and central truth of this historic economic event, heretofore banished from polite conversation by an omertà of the economic brethren.

Yet why, among the endless lending, spending, and Tarping (unending?), does monetary policy not even get a mention when we talk about building a more robust economic system for the future? Obviously the Fed and Treasury are taking unprecedented and, I would even say, bold and creative actions to relieve the immediate crisis.

But when we contemplate a new financial order, when the the G20 meets in London to supposedly consider a Bretton Woods II, when economists begin revising their models of risk and politicians fantasize of new regulatory strictures on banks, hedge funds, investors, and lenders — when we gab about full-proof prevention of such trauma in the future — why do the key players neglect to even gently raise the “overwhelmingly powerful” central error of the whole episode?

New computer models. International super-regulators to spy and pierce bubbles. A rich new slush fund for IMF bureaucrats. Austere new pay limits for private finance. Cramming down mortgages. Propping up banks. All talk of money. Yet no mention of . . . the dollar.

Credit’s fiercest disciplinarian is sound money. The best regulator of risk is a stable currency. Far more than the new policy contraptions proposed by Davos dreamers and Gaussian copula critics, it is the elemental simplicity of a low-entropy dollar that can once again be the steadfast foundation for dynamic creativity and the measuring stick and promoter of real economic value.

(Hat tip: Social Security Institute)

UPDATE: See The Wall Street Journal’s excellent editorial on this important concession. 

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