'Circling the Wagons'

Brian Wesbury:

"In a recent interview with the Financial Times, US
Treasury Secretary Hank Paulson blamed the credit crisis on
global imbalances. Specifically, he repeated a story-line
popularized by Alan Greenspan and Ben Bernanke that a
global savings glut (imbalance) pushed interest rates down
around the world and drove investors toward riskier assets.

We call this “circling the wagons” because what this
argument does is shift the blame. It shifts the blame off of
the Fed, who pushed interest rates down too far in 2002-
2004. It also lets the Fed off the hook for using the phrase
'considerable period,” in an era of 1% federal funds rates to
basically double-dare hedge funds and investment banks to
use massive leverage.

It lets rating agencies, which are sanctioned by the
federal government, slide, despite their huge mistakes. It
whitewashes Fannie Mae, Freddie Mac and the politicians
who supported their ability to hold mortgage rates down
artificially. It also ignores rules and regulations, such as the
Community Reinvestment Act (which forced banks to make
low income loans), and mark-to-market accounting (which
artificially pushed up capital ratios at financial institutions in
the early 2000s as the Fed cut interest rates and risk spreads
narrowed as leverage increased).

Most importantly, it fans fears of global financial
markets, free trade and free markets in general. If this
argument influences policy debate, it will lead toward
protectionism or devaluation."

Read the whole thing.