Back in Time

Megan McArdle has a great post up looking back at what went wrong and what could’ve been done differently to avert the financial crisis we find ourselves in today. Have a close read, because it’s very smart.

One thing jumps out at me in particular:

How should the Federal Reserve have dealt with the river of money flowing into American markets from central banks and savers abroad? This was the primary culprit in the credit expansion, not the Fed–indeed, that’s why the yield curve got so funny looking at the end.

I, like Megan, don’t have a concrete answer to this. I will go out on a limb, though, and say that I don’t think the Fed should directly shoulder any blame here.

The blame ought to go to those economists and policy-makers who not only failed to see how these inflows were a bad omen, but who actively argued that things could continue like this indefinitely.

Take for example this passage from Hulsmann & Surzenegger’s infamous “Dark Matter” paper from 2005:

But wait a minute. If this is such an open and shut case, why has there been no crisis yet? Why is the world willing to lend continuously to the US and to do so at such low interest rates? Why do markets not react to the wisdom that is being so generously given to them? One possibility it that the March of Folly is an inevitable feature of human hubris and it is the role of the dismal scientist to act as a modernday Jeremiah. Or maybe, there is something seriously wrong about this worldview.

Ahem.

I especially like it when they hubristically mock charges of hubris.