Better regulation of the banks, not the Fed, is needed—no matter what Ted Cruz saysby Avinash Persaud / February 9, 2016 / Leave a comment
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The counter-revolution is here and it’s being led by one of the top candidates for the Republication Presidential nomination, Ted Cruz. After a major financial crisis, such as the one in 2008, the time is ripe for radical reform. Deluded cries of “this time is different” heard during the previous boom are replaced with angry shouts of “never again” as the bust unfolds. But the moment for reform is in the direct aftermath of a crisis. If this opportunity is not grasped, it soon submerges along with the memory of the hard-to-measure dynamics of the crisis and how it upended prevailing beliefs.
At that point, those stationed far from the crisis, those more politically motivated, or those too young to remember, find data that appears to invoke the old certainties. They propose more radical applications of the same ideas that were found wanting. The sign that this counter-revolution is here is the increasing repetition of the belief that the last economic crisis was caused not by a collapse in house prices and the nexus between housing, banking and the economy, as a measured analysis might conclude, but by the US Fed keeping interest rates too high for too long in the summer of 2008. Leading proponents of this idea, including Ted Cruz, conclude that it is the Fed, not the banks, that need to be on a tighter leash.
This argument—which can be summed up as “It’s the Fed, stupid!”—is that the collapse in US personal consumption occurred in 2008, while the housing crisis began a full two years before. During these two years, the impact on consumer spending was slight and no one anticipated the credit crisis snowballing into something bigger because only six per cent of bank assets were exposed to sub-prime mortgages. Proponents argue that the spending crunch in 2008 occurred at exactly the same time as monetary policy was “tightening.” By that they mean that there was a five-month period when interest rates were held at 2.25 per cent while inflation expectations fell by 1.0 per cent and so real…