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It is a grave error to ascribe the credit crisis to greed. Financiers will always cut corners to make a quick buck. Investment and commercial bankers, hedge fund managers, the staff of ratings agencies and just about anyone else employed in the financial world may be worthy targets of our criticism. But their behaviour was predictable. The real responsibility lies higher up. Central bankers are the appointed guardians of the credit system. Yet not only did they fail to predict this crisis, their mistaken policies are directly to blame for the mess we’re in.
The greatest error of central bankers has been their failure to understand the dangers posed by asset price bubbles. Former Chairman of the Federal Reserve Alan Greenspan led the central banking community in claiming that it was impossible to identify bubbles in advance. In fact, it’s pretty easy to spot a bubble forming—many analysts, including Robert Shiller of Yale University and Andrew Smithers of Smithers & Company, correctly identified both the technology and real estate bubbles of the last decade in advance. Only the current Fed chairman Ben Bernanke and a few excitable property speculators or “flippers” were caught off guard when the property bubble burst.
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