Monday, February 11, 2008

The G7: "Who, Me?"

This weekend, the seven world industrial leaders (US, Japan, UK, France, Germany, Italy, and Canada) sent their central bankers to Tokyo to discuss the economy.

[This great deer-in-the-headlights face from]

Typical of central bankers, at no time does any one of them suggest that maybe they had a hand in creating the current credit crisis.

Writers in today's Wall Street Journal (Michael M. Phillips and Yuka Hayashi) give us a report of what our central bankers are discussing.

The causes of the crisis, our bankers say, are:

- Poor underwriting of subprime mortgages and some fraudulent practices in the US industry;

- Rising defaults among subprime borrowers that led to confusion about the value of securities for which the loans were collateral;

- Lack of due diligence on the part of banks regarding the nature of these loans;

- Resulting timidity on the part of the banks holding some of these unquantifiable loans, who found themselves unable to evaluate the value of their portfolios and thus unable to offer or obtain credit from their peers;

- Poor evaluation of risk by the rating agencies;

- Misplaced incentives in the compensation of financial institution employees; and

- High oil prices.

At no time does anyone think to suggest that maybe the world's central bankers might have been inflating money supply to an excessive degree, and that maybe excessive leveraged speculation might have created a ponzi scheme of unworthy credit, both of these phenomena creating the bubbles and bursts that we have experienced.

Oh no, we can't blame the central bankers.... For more details on how these two processes work, see this article, this article, and this article, Page 1 and Page 2.

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