RWE – The news media is on trial. That’s undoubtedly true but the more egregious failure was the dominance of Group Think among those who were paid to know better. Even Greenspan admitted “we” were wrong to think that markets could self-correct under extreme levels of risk. I posted this link once before but here it is again. Same for a Blind Congress. It was a Trifecta.
Ignoring the Oracles: You Are With the Free Markets, or Against Them
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It’s hard to tell what’s more striking about Raghuram Rajan’s 2005 presentation at the Kansas City Fed’s Jackson Hole symposium — the way many of the dangers he laid out came to pass, or the way he was attacked, and then discounted. (Read the full story.).
Mr. Rajan came to the conference, dedicated to soon-to-retire Fed Chairman Alan Greenspan, with strong bona fides as a pro market advocate. He and University Chicago colleague Luigi Zingales wrote a 2003 book, “Saving Capitalism from the Capitalists,” that argued at length that free-market capitalism is the best way to organize an economy, and that free financial markets – through their ability to direct funds to where the economy needs them most – are crucial to the system’s success. But when he suggested at Jackson Hole that markets could get it badly wrong sometimes, and that central banks should consider responding to that, he was lambasted as nostalgic for the old days of highly regulated banking.
Fed Governor Donald Kohn – who for years has played the role of providing intellectual ballast to the central bank’s decisions and now serves as its Vice Chairman – said that for central bankers to enact policy’s aimed at stemming risk-taking would “be at odds with the tradition of policy excellence of the person whose era we are examining at this conference.” Former Treasury Secretary Lawrence Summers said the premise of Mr. Rajan’s paper was “misguided.”
“This is a common feature of people when they come across dissent – they want to put you in a box and label you and dismiss you,” says Mr. Zingales. “He is definitely not anti-market. That’s the most mistaken characterization of Raghu.”
The episode suggests one reason that the crisis went unchecked: A dangerous all-or-nothing orthodoxy had come to dominate the policy debate, where one was either for free markets or against them.
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