Lessons from the global financial crisis

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Lessons from the global financial crisis

    Thomas F. Wilson

    TWO lessons emerge from the financial crisis.

    One is obvious, at least in retrospect. Bubbles are dangerous.

    Another lesson, in my opinion, is the opposite of conventional wisdom. It wasn’t an absence of regulations that was to blame; it was an absence of regulators doing their job.

    The Federal Reserve maintained for many years that bubbles are best left to deflate themselves. Then, the central bank can ease policy to counter any ill effects.

    Now of course, there are realistic fears of a Treasury debt-dollar bubble.

    Indeed, the Fed inflated the housing bubble with exceptionally low interest rates to cope with the bursting of the dot-com stock market bubble.

    Not only were mortgage loan rates held low, but of course unconventional, subprime lending reached a massive scale.

    Risky “buyers” were granted loans with essentially zero down payments.

    Mortgage lenders were giving free call options to homebuyers. House prices go up, the homebuyer wins. House prices go down, the mortgage lender loses — except of course many loans were sold to investors.

    Commentators suppose there were some bad assumptions here: the price of houses always goes up, and the broadening of homeownership was a good thing.

    There was an accompanying assumption: individual risks were uncorrelated, or even that a pooling of risks lowered the overall risk.

    These assumptions seemed to deny the existence of a housing bubble and the risks in the loans.

    It seems incredible that the Federal Reserve failed to safeguard the safety and soundness of the banking system.

    Other regulators, government sponsored corporations, credit rating agencies, investment banks, commercial banks, mortgage companies, and insurance companies all seem to share the blame.

    What I contend is that calls for more regulatory powers reflect various agendas unrelated to the crisis by some and diversionary tactics by the regulators themselves who want to shift attention from their failure to do their job.

    Beyond that, the U.S. experience is a good case study for China, as China increasingly offers good case studies for the United States.

    (The author is a retired American banker and economist, who has taught finance at Shenzhen University.)