Thursday, October 23, 2008

How We Got in this Financial Mess

The best information I have read to date about how we got here and where we need to go is by Steve Forbes here. Mr. Forbes contends that bad monetary policy under the leadership of Alan Greenspan in 2004, as well as misguided regulation, led to the current difficulties. Nonetheless, he is, as he is prone to be, relentlessly optimistic about the future:

If sensible rescue efforts continue--and they will--the immediate crisis will quickly pass. Shell-shocked businesses and consumers won't recover rapidly from the trauma of recent months, especially as we now cope with recession. But the downturn shouldn't be prolonged: The economy here and those overseas should start to pick up no later than next spring.

That soon? Despite the crisis, the global economy still retains enormous strengths. Between the early 1980s and 2007 we lived in an economic Golden Age. Never before have so many people advanced so far economically in so short a period of time as they have during the last 25 years. Until the credit crisis, 70 million people a year were joining the middle class. The U.S. kicked off this long boom with the economic reforms of Ronald Reagan, particularly his enormous income tax cuts. We burst from the economic stagnation of the 1970s into a dynamic, innovative, high-tech-oriented economy. Even in recent years the much-maligned U.S. did well. Between year-end 2002 and year-end 2007 U.S. growth exceeded the entire size of China's economy. Obviously China's growth rates were higher, but China was coming off a much smaller base.

The world is flush with cash. It's frozen because of fear, but the cash is there. Productivity gains are burgeoning.


So, will this global boom resume next year, slowly at first and then with increasing momentum? It should. Whether that happens, however, depends on the next, highly dangerous phase: the political aftermath.

Let's hope he is right. Mr. Forbes lays out a number of policy prescriptions, some of which, such as the flat tax, are unfortunately political non-starters. Nonetheless, the article makes for a compelling read.

Hat Tip: Instapundit

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