Home truths about the causes of the financial crisis

Warsh.jpgDarwin hit it on the nail when he wrote in ‘Origin of the Species’ that “Unless profitable variations occur, natural selection can do nothing“.

His message is echoed today by US Fed Governor Kevin Warsh, one of the few policy-makers who deals in reality rather than wishful thinking.

Warsh sets out to “debunk some popular truths that have become part of the crisis narrative“::

• “Subprime mortgages were not the core of the global crisis, they were only indicative of the dramatic mispricing of virtually every asset everywhere in the world“.
• “The volatility in financial markets is not the source of the problem, but a critical signpost.”
• “Excessive growth in government spending is not the economy’s salvation, but a principal foe.”
• “The European sovereign debt crisis is not upsetting the stability in financial markets; it is demonstrating how far we remain from a sustainable equilibrium.”
• “Turning private-sector liabilities into public-sector obligations may effectively buy time, but it alone buys neither stability nor prosperity over the horizon.”

Warsh believes we delude ourselves if we think today’s problems are essentially “a series of unrelated, unpredictable, unfortunate financial shocks” and due to “bad luck“.

He concludes by arguing that instead of continuing to focus on short-term ‘fixes’, “we should take the necessary measures to ensure that our economy is strong over the long term“.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. He also serves as a Global Expert for the World Economic Forum. The aim of this blog is to share ideas about the influences that may shape the chemical industry and the global economy over the next 12 – 18 months. It looks behind today’s headlines, to understand what may happen next in critical areas such as oil prices, China and Emerging Markets, currencies, autos, housing, economic growth and the environment. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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One Response to Home truths about the causes of the financial crisis

  1. David Hughes 30 June, 2010 at 5:40 pm #

    Fantastic speech … thanks for finding it !

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