Banks threw money at overleveraged people and corporations in hopes of making money on probability. For every default, a number of those that don't default could keep the balance up. Also, when a default does occur, the bank claims the asset base used to provide the credit in the first place. There are several problems with the whole system though. The assets used to give the credit are most likely built on already leveraged loans, but the weight of this is never given priority. Also, that credit given is money created out of thin air. The bank doesn't have the capital base to givethe actual money to you so they just give you a credit. Banks are only required to keep a small fraction of their total outstanding loan debt in actual cash. If every one that had their money with a bank suddenly wanted to cash out, the bank would default. Banks typically push these limits to the extreme and that partly the reason for overnight repos by the FED in the system. It provides liquidity to the banking system to help keep them afloat. Eventually, what you have is a whole system of loans that are built one on top of another. These loans are nothing but created money, or credit, and the asset base to maintian these loans is small. For every dollar you put into savings at a bank, about 10 times as much is lent out in credit to others. The problem becomes obvious when a run on withdrawels occurs at the same time there is an increase in loan defaults during a recessionary and especially a depressionary time. The banks are never too big to fail, but the government does have to step in to save them on occasion out of necessity to abort a disaster. I fail to see why the FED is the cause, but rather the hand that has to keep them afloat. Unfortunately, the actions they take only serve to allow the banks to continue their faulty processes, so I'll agree with you there, but it's out of necessity.
The productivity miracle...well, that one is an essay in itself, though we know now it never existed. It stemmed from a variety of reasons, of which the FED did help to herald, but they weren't the only factor.
The derivative traders fall under the same catagory of the banks. The FED bails them because they have to and again, it only serves to keep them going in their faulty ways, but out of necessity.
The FED has tried to warn people on accepting too much risk, but the mass of many fueled by greed will never be overcome by the FED.
I guess what I am trying to say, is that perhaps AG and the FED does have some hand in it. But he is hardly the root cause. Their biggest mistake was providing too much liquidity during the last stage of the run out of Y2K fears, but at that point, the mania was well on its way. However, think the finger can be pointed much more readily to many other factors in the economy that played a larger role in the problems. |
