There is a very strange piece in The Age and Sydney Morning Herald today. It seems that that the war on terror is an antecedent to the GFC. Here is the ‘logic’ of the argument.
Step 1. (emphasis added).
To raise funds to finance such an ambitious military adventure, the Bush administration tapped the international capital market by selling billions of dollars worth of treasury bonds in a few years. To make the US debt competitive, the Federal Reserve progressively slashed interest rates, which fell from 6 per cent on the eve of September 11 to 1.2 per cent by mid-2003, when Washington thought it had won the war in Iraq following the initial invasion. The then-chairman of the US Federal Reserve, Alan Greenspan, went along with this strategy even though the world economy was growing too fast and needed higher rates to prevent the formation of financial bubbles.
Step 2.
The steep fall in US and world interest rates between 2001 and 2003 created the ideal conditions for the spread of the subprime mortgage crisis and for the securitisation of bad debts – the genesis of the credit crunch. That policy precipitated the bankruptcy of Iceland, a country that accumulated a debt 12 times the size of its gross domestic product, and the solvency crisis of Greece.
I agree that US interest rates were too low for too long – that is an argument that John B. Taylor has made. What I don’t understand is how you make bonds competitive by lowering interest rates. Quite the contrary, bonds become competitive by selling them at low prices i.e. high yields. So the first step in the argument fails. Now I don’t want to say that war financing doesn’t distort the economy and that there haven’t been problems in the prosecution of the war on terror, but I don’t think the argument here supports the contention being made.
I think the idea is that they used their regulatory power to suppress private sector interest rates so they could sell their bonds for more. Stage two would presumably be to jack interest rates up so they could buy back at a discount.
Timothy Can
30 Aug 10 at 8:43 am
Isn’t this similar to what Stiglitz has said? (I could be wrong, I am by no means a Stliglitz expert, for the obvious reason that it would be too painful to read even a fraction of all the drivel he writes).
Milton Von Smith
30 Aug 10 at 10:33 am
LOL, It’s always Goldman Sachs.
Wall Street monoliths such as Goldman Sachs and JPMorgan took advantage of declining interest rates to allow countries, as well as corporations and individuals, to live beyond their means. Naturally, in the process, they pocketed large sums of money.
I’m now going to call this swill economics for troofers, or Troofer economics.
Stop buying The Age, Sinc. It’s a waste of money. OF course buy it though if you want a laugh.
JC
30 Aug 10 at 11:04 am
JC – wash your mouth boy. I read the Age online.
Sinclair Davidson
30 Aug 10 at 11:08 am
Stop attempting to cover up the tracks for your brother conspirators, Cambria. Comrade Bird will get to the bottom of this.
jtfsoon
30 Aug 10 at 11:08 am
The effect of war spending on fiscal trends – and Stiglitz’s baloney in particular – have been demolished by this handy CBO-sourced graph:
Deficits With and Without The Iraq War.
C.L.
30 Aug 10 at 11:18 am
lol…
Yes sinc, but you realize even that online has a cost… electricity usage. Ha!
Damn you caught me again, Jase. I’m always trying to deflect that my co-conspirators in all this.
JC
30 Aug 10 at 11:18 am
The stig should give back his his Nobel, as he clearly is undeserving and it was a mistake.
JC
30 Aug 10 at 11:20 am
It’s not too whacky.
US BLS labour productivity growth slowed from March 03 to March 07.
That’s (part of) the backstory to the initial delinquencies that precipitated in a liquidity crisis.
Some of this was caused by explicit and implicit costs of war.
.
30 Aug 10 at 12:53 pm
I think bin Laden is very happy with the way America is right now.
.
30 Aug 10 at 12:53 pm