Financial Crisis and Asset Bubbles and things

I'm always interested to hear of thoughtful insights into why we had that global financial crisis. You know. What was the fundamental cause. I expressed my thoughts about it - a bit amateurish I know - on this blog:
http://joelcayford.blogspot.com/2008/12/how-should-auckland-respond-to-global.html
Looks like it was December 2008.

Anyway. I get sent stuff from time to time from my friends at The Resource Rentals for Revenue and Justice Association. Their motto goes: "Pay for what we hold or take, not what we do or make..." and further explanation: "Private Enterprise must not include private ownership of the elements of life. Free trade must not include the freedom to 'invest' in ownin others' natural resources which should rightfully be their source of revenue".

A lot of the thinking behind this association is to do with tenure. And land development.
Anyway. A while ago I was sent an editorial/opinion piece from the Sydney Morning Herald, written by Peter Hartcher who is the Sydney Herald's International Editor. It is dated 22 Sept 2009. I read it and was interested in the way it characterised the crisis, and what - if anything - we have learned from it, and what is happening now.

Here are some paragraphs:

"...the first of the great systemic problems. It's called "moral hazard". Meaning?

If you think you are completely safe from any risk, you will behave recklessly. Goldman's, like most banks and investment banks around the world, has just seen what happens if you take absurdly dangerous risks.

Answer: you make out like bandits.

The Government rescues you if anything goes wrong and the boss even gets to keep his job. One US investment bank was allowed to fail outright. Lehman Brothers.

This was the event that took a Wall Street crisis and made it a global one. Officials will be extremely wary about letting any big institution fail in future. Moral hazard, already big before the crisis, has become giant.

The G20 will pretend that curbing bankers' pay and raising capital requirements will solve the problem. It will not.

The incentive to take maximum risk has only increased...."

and

"....The other great flaw is the problem of bubbles.

Every decade or so, a huge asset bubble develops. That is, a dangerously big bulge in the price of shares or real estate. Japan's land and share bubble of the 1980s wrecked the world's second biggest economy.

The US housing bubble of 2003-07 wrecked the world's biggest economy, taking the global economy down with it.

Each bubble formed when central banks allowed money to become too cheap.

When interest rates are so low that money is, essentially, free, people abuse it.

A bubble follows. Disaster is only a matter of time.

The world's central bankers have been programmed to be vigilant against inflation in the prices of goods such as bread and petrol, but to ignore inflation in the price of assets such as shares or real estate.

They must be reprogrammed.

But they are deeply invested in the old orthodoxy...."

What I like about this is its reminder that it was the US housing bubble of 2003-07 that wrecked the US economy, and took the rest of the global economy with it. In NZ I see too often the argument that it was the finance industry that caused the crash, without properly looking behind that veil and seeing what was happening on the ground.

What I also like about it is the reminder of the extent of the corporate banking bailouts that have happened round the world, and which are still happening, and having little effect it seems on the behaviour of lending institutions.

You can see the whole article at: http://www.smh.com.au/opinion/society-and-culture/greed-is-god-again-and-we-have-learned-nothing-20090921-fyjr.html