The thesis of the article was simple: The current financial crisis isn't the result of a free market failure because there is no free market. The current financial crisis is the result of a credit bubble created by the U.S. government.

I wrote. . .

The housing bubble was the result of a massive government stimulus plan. Right after 9/11, the U.S. Treasury and U.S. Federal Reserve cut rates to historic lows and increased money supply to obscene levels.

Couple that with the push for more home ownership. . . and what you get is a toxic brew of government-sponsored economic activity.

This raised the ire of every government lover who read my article.

Steven writes. . . "Bullcrap. Read the tea leaves, dude, and leave the Kool-aid alone."

Conner comments. . . "The problem wasn't expanding home ownership to include low income home buyers. The problem was deregulation, which is the fault of the GOP. The Clinton Administration never said do it at all cost. The GOP has always supported laissez-faire. That's the very reason why our food supply and medicine is tainted. Are you going to blame the Democrats for that too?"

Tony says. . . "The heading of your article is to the point; but like many others you are just stoking the partisan debate by pointing out what liberals did wrong instead of what you think a free market should be."

And Susan writes. . . "Fess up. . . deregulation and the free market are to blame. It's time for a change! Only the government can properly manage an industry like housing."

Well, well, well. . .

My article was published on April 1.

The Wall Street Journal ran this on May 12:

MAY 12, 2009 - Geithner's Revelation

He concedes that monetary policy was "too loose, too long."

The Earth stood still, the seas parted and a member of the U.S. political class admitted last week that the Federal Reserve helped to cause the financial meltdown. OK, only the last of those happened, but it's a welcome miracle nonetheless.

The revelation came from Timothy Geithner last Wednesday with PBS's Charlie Rose, who asked the Treasury Secretary: "Looking back, what are the mistakes and what should you have done more of? Where were your instincts right, but you didn't go far enough?"

Mr. Geithner: "We need a little more time to get full perspective."

Mr. Rose: "Right."

Mr. Geithner: "But I would say there were three types of broad errors of policy and policy both here and around the world. One was that monetary policy around the world was too loose too long. And that created this just huge boom in asset prices, money chasing risk. People trying to get a higher return. That was just overwhelmingly powerful."

Mr. Rose: "It was too easy."

Mr. Geithner: "It was too easy, yes. In some ways less so here in the United States, but it was true globally. Real interest rates were very low for a long period of time."

Mr. Rose: "Now, that's an observation. The mistake was that monetary policy was not by the Fed, was not. . ."

Mr. Geithner: "Globally is what matters."

Mr. Rose: "By central bankers around the world."

Mr. Geithner: "Remember as the Fed started — the Fed started tightening earlier, but our long rates in the United States started to come down — even were coming down even as the Fed was tightening over that period of time, and partly because monetary policy around the world was too loose, and that kind of overwhelmed the efforts of the Fed to initially tighten. Now, but you know, we all bear a responsibility for that. I'm not trying to put it on the world."

Mr. Geithner went on to cite a lack of supervision over bank risk-taking and the slow pace of government response to the problem — both of which are now conventional wisdom. But the real news here is Mr. Geithner's concession that monetary policy was "too loose, too long." The Washington crowd has tried to place all of the blame for the panic on bankers, the better to absolve themselves. But as Mr. Geithner notes, Fed policy flooded the world with dollars that created a boom in asset prices and inspired the credit mania. Bankers made mistakes, but in part they were responding rationally to the subsidy for credit created by central bankers.

We disagree with Mr. Geithner on one point. He's right that monetary policy needs to be considered in global terms, but he's still too quick to pass the buck from the Fed to other central banks. The European Central Bank was much tighter than the Fed throughout this period. The Fed was by far the major monetary player because much of the world was on a dollar standard, with its monetary policy linked to the Fed's. That was true of China, most of Asia and the Middle East.

The Fed's loose policy from 2003 to 2005 created the commodity and credit bubbles that made these countries flush with dollars. Given their low domestic propensity to consume, these countries then recycled those dollars back into dollar-denominated assets, such as Treasurys and real-estate-related assets such as Fannie Mae securities. The Fed itself had created the surplus dollars that kept long rates low and undermined for a substantial period its belated attempts to tighten.

Mr. Geithner's concession is important nonetheless because before he moved to Treasury, he was vice chairman of the Fed's Open Market Committee that sets monetary policy. His comments mark a break with the steadfast refusal of Fed Chairmen Alan Greenspan and Ben Bernanke to admit any responsibility. They prefer to blame bankers and what they call the "global savings glut," as if the Fed had nothing to do with creating that glut.

Mr. Geithner's remarks are a sign of intellectual progress, and they suggest that at least some in government are thinking about their own part in creating the mess. The role of Fed policy should also be at the heart of the hearings that Speaker Nancy Pelosi is planning on the causes of the financial meltdown. We won't begin to understand the credit mania and panic until we acknowledge their monetary roots.

How does this make y'all feel?

Vindicatedly yours,

Brian Hicks

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