Put the Blame on Gorby

Dolors & Sense

by Sanford Rose

KISSIMMEE FL—(Weekly Hubris)—3/7/11—Who caused the financial crisis? According to the recently issued final report of a blue-ribbon governmental commission: practically everyone—and therefore, of course, no one.

Perhaps this august body is merely waxing Shakespearean: “The fault, dear Brutus . . .”

Indeed, we usually get what we deserve and reap what we sow. But I would like to narrow the focus a bit. The man who is most responsible for the financial crisis is Mikhail Gorbachev.

You see: Reagan had it wrong. Instead of saying, “Tear down that wall, Mr. Gorbachev,” he should have said, “Build it higher.”

Gorbachev tore it down, unleashing a chain of events that led, in an iron causal chain, not only to the well-known fall in communism but also to the near-collapse of the capitalist system that is held to have undermined it.

The following chain of “reasoning” is adapted, somewhat freely, from the very words before that august government commission of the quondam Master of the Universe, Alan Greenspan.

The collapse of the wall, and diverse related events, laid bare the inadequacies of central planning.

The publicity accorded this intelligence freed up the hands of the Chinese leadership to unleash their brand of state capitalism.

The Chinese economy took off.

The Chinese grew rich fast.

They grew rich so fast that they could not find enough outlets for their savings.

So they sent the money into the US capital markets.

Long-term rates in the US plunged, perhaps by nearly 1.5 percentage points relative to what they would have been.

The fall was so hard that the Fed, which was raising short-term rates, could have virtually no impact on the long rates that determine the yield on mortgages.

Mortgage yields fell so much and, concomitantly, real-estate values rose so much that we were off to the races.

Everyone bought a house, putting up zero equity, thanks to home equity loans, dubbed the piggyback effect. (The return on housing was thought to be much higher than the return on stocks, which took their sweet time to recover from the crash at the beginning of the millennium.)

The resulting mortgages—many made under the banking industry’s creative application of the military rubric “Don’t ask; don’t tell”—were even more creatively packaged into securities unrivalled in their opacity and sold to a world hungry for “secure, high-quality” investment instruments—a world that, of course, included the Chinese.

So the proximate cause of our crisis was the Chinese (as we all knew, of course). But the ultimate cause was undoubtedly the man who fanned their capitalist embers—Gorbachev.

Or was it Reagan?

Comedy tonight!