Ritholtz on How the Financial Crash Happened

Here is a bit from an interview of Barry Ritholtz, author of Bailout Nation, by the New Jersey Star Leger. The interviewer asks about the events that brought the country to the brink of economic collapse:

Q: What is the big-picture view of how the nation got to where it is?

A: There were a number of factors that took place. They're all interrelated. It begins probably 30 years ago with the idea that excessive, complex, and costly (government) regulation is a bad thing, and we need to reduce that.

And what ended up happening is somehow that concept morphed into any form of regulation is bad. There's a balance in the economic world between encouraging financial innovation and allowing rougue brokers to become reckless and threaten the world economy.

If you and I, as taxpayers, have the obligation to be there when these guys screw up we should have the ability to say we're going to put a speed limit here and not let you go 180 mph.


Q: What other elements helped cause the current recession?

A: The Federal Reserve had encouraged a lot of easy money by essentially taking (interest) rates really low and keeping them there for way too long. When we make the cost of borrowing really cheap, we're going to encourage people to go out and find things to do with their money.

In January 2001, (Alan Greenspan) started cutting rates down to unprecedented levels. They had been down to under 2 percent previously, (in the 1950s and 60s) but just for really brief periods. Rates were not below 2 percent (for several) quarters at a time.

Greenspan took rates under 2 percent for over 36 months. And he took rates to 1 percent for more than a year. Simply unprecedented.

Notice that Ritholtz points to the crazy right wing "government is bad" mantra as part of the problem.

He notes that Greenspan kept rates too low for too long. But Ritholtz doesn't point out that putting an Ayn Rand ideologue, Alan Greenspan in charge of "regulation" -- that's the job of the Federal Reserve, to "manage" the economy through its regulatory authority -- was bizarre.

Here's the bottom line for Barry Ritholtz:

Q: So, how did cheap money result in the age of bailouts? Why are bailouts so bad?

A: Essentially, the Treasury Department and the Federal Reserve panicked and just started throwing as much money as they could at these (banks). The phrase that we heard was that we have to save the banking system.

But if you want to save the banking system, you don't care about individual banks. The best example of that is Japan in 1989. They had zombie banks around for 10, 15 years. They didn't put any of their banks out of their misery, and they had a decade-long recession.

The idea of saying Citigroup is insolvent was unthinkable to them. They were a sacred cow. If the sacred cow gets mad cow disease, you've got to put it down. The problem with bailouts in general is when an industry or company goes bankrupt it typically means that there is a structural flaw in the setup of that company.

Instead of fixing the problem we're essentially covering up the cracks with a lot of cash. We (still) have banks that are engaged in any manner of highly leveraged, highly reckless speculation. We have yet to fix that.