Highly respected former Commonwealth Bank CEO and the Chairman of Australia’s Future Fund, David Murray AO, yesterday attacked central banks for their role in the global financial crisis. In a wide-ranging speech given at RiskMetrics’ Annual Corporate Governance Conference in Melbourne, Murray criticized ratings agencies and financial sector remuneration levels, but noted that the current economic malaise was not caused by excessive greed, but rather due to a period of expansionary monetary policy.

Murray claimed that expansionary monetary policy led to credit becoming cheaper and, by implication, caused asset returns to be artificially inflated. According to Murray, such expansionary monetary policy in combination with “hopelessly flawed” US regulators has led to the current turmoil in financial markets.

While not naming names, many suspect that Murray may have been referring to former Chairman of the US Federal Reserve, Alan Greenspan. Greenspan was in charge of US monetary policy between 1987 and 2006 and has been widely criticized for running an overly expansionary policy in the wake of the 2001 recession and September 11 terrorist attacks. Between 2001 and 2004, US interest rates were reduced from 6.50 percent to only 1.00 percent. The policy is believed to be the major culprit of the US housing boom and subsequent plunge.

Greenspan has not however, shown a large amount of contrition since his resignation in January 2006. Writing in the Financial Times last week, Greenspan refused to take blame for the current malaise, instead noting that, “it is clear that the levels of complexity to which market practitioners, at the height of their euphoria, carried risk-management techniques and risk-product design were too much for even the most sophisticated market players to handle prudently.”

Greenspan held somewhat different views during his tenure as Chairman of the Federal Reserve. In fact, Greenspan told the US Senate Banking Committee in 2003 that:

What we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn’t be taking it to those who are willing to and are capable of doing so…we think it would be a mistake to more deeply regulate the contracts.

Back to the present, and Greenspan also once again attempted to re-write history, noting in the Financial Times last week that:

I opined in a federal open market committee meeting in 2002 that “it’s hard to escape the conclusion that … our extraordinary housing boom … finan­ced by very large increases in mortgage debt, cannot continue indefinitely into the future”.

Some may wonder why Greenspan (who has been referred to as Mr Bubble by some commentators) was able to recognise as far back as 2002 that the housing boom was caused by large increases in mortgage debt, but still continued to maintain an expansionary monetary policy for a further two years. A policy that unsurprisingly led to more mortgage debt and exacerbated the bubble. (The Greenspan legacy has been willingly embraced by his successor, Ben Bernanke, who has also dropped rates to zero, and along with his UK counterpart, is now embarking on a period of quantitative easing, otherwise known as printing money).

Murray’s astute observations as to the cause of the current financial crisis are being largely ignored by central banks and governments, who are embarking on a period of unparalleled fiscal spending and monetary expansion. As if the cure to too much debt, is further debt. This will simply serve to help the indebted and irresponsible, and punish the prudent.

Peter Fray

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Peter Fray
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