In retrospect it is also clear that we gave far too much credit to “Washington,” to the IMF and the Treasury… — Paul R. Krugman
In retrospect it is also clear that we gave far too much credit to “Washington,” to the IMF and the Treasury. It was true that they had acted courageously and decisively, and that the results had been a vindication. But on close examination the omens were not all that good for a repeat performance. For one thing, the mobilization of money was achieved through what amounted to a legal sleight of hand, justified mainly by the special significance of Mexico to U.S. interests. Money would not come as quickly or as easily in later crises. The Mexican rescue was also made less complicated by the cooperation of the Mexican government: Zedillo’s people had no pride to swallow—not with Mexico’s history—and were in complete agreement with Washington about what needed to be done. Dealing with Asian countries that had been accustomed to negotiating from a position of strength, and with Asian leaders accustomed to having things their own way, would be very different.
Perhaps most of all, we failed to understand the extent to which both Mexico and Washington simply got lucky. The rescue wasn’t really a well-considered plan that addressed the essence of the crisis: it was an emergency injection of cash to a beleaguered government, which did its part by adopting painful measures less because they were clearly related to the economic problems than because by demonstrating the government’s seriousness they might restore market confidence. They succeeded, albeit only after the economy had been punished severely, but there was no good reason to suppose that such a strategy would work the next time.
Source: Wikiquote · CC BY-SA 4.0
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Indeed, there has long been a strand of thought that says that moderate inflation may be necessary if monetary policy is to be able to fight recessions. Still, advocates of inflation have had to contend with a deep-seated sense that stable prices are always desirable, that to promote inflation is to create perverse and dangerous incentives. This belief in the importance of price stability is not based on standard economic models—on the contrary, the usual textbook theory, when applied to Japan’s unusual circumstances, points directly to inflation as the natural solution. But conventional economic theory and conventional economic wisdom are not always the same thing—a conflict that would become increasingly apparent as one country after another found itself having to make hard choices in the face of financial crisis.
As I’ve just noted, Greenspan warned about irrational exuberance, but he didn’t do anything about it. And in fact, the Fed chairman holds what I believe is a unique record among central bankers: he presided over not one but two enormous asset bubbles, first in stocks, then in housing.
But this warning was ignored, and there was no move to extend regulation. On the contrary, the spirit of the times—and the ideology of the George W. Bush administration—was deeply antiregulation. This attitude was symbolized by a photo-op held in 2003, in which representatives of the various agencies that play roles in bank oversight used pruning shears and a chainsaw to cut up stacks of regulations. More concretely, the Bush administration used federal power, including obscure powers of the Office of the Comptroller of the Currency, to block state-level efforts to impose some oversight on subprime lending.
