I have said on numerous occasions- In times of stress, read Richard Fischer of Dallas Fed.
In his recent speech he says financial crisis have been there since ages and defends recent Fed decisions. I just loved his anecdote involving Paul Volcker, now the adviser to President-elect Obama:
Paul Volcker told me recently that in his day, he knew that a bank was headed for trouble when it grew too fast, moved into a fancy new building, placed the chairman of the board as the head of the art committee and hired McKinsey & Co. to do an incentive compensation study for the senior officers.
This really hits hard.
Fisher also points to quotes which seemed to have been written describing today’s crisis:
Every now and then the world is visited by one of these delusive seasons, when ‘the credit system’ … expands to full luxuriance: everyone trusts everybody; a bad debt is a thing unheard of; the broad way to certain and sudden wealth lies plain and open; and men … dash forth boldly from the facility of borrowing.
“Promissory notes, interchanged between scheming individuals, are liberally discounted at the banks…. Everyone talks in [huge amounts]; nothing is heard but gigantic operations in trade; great purchases and sales of real property, and immense sums [are] made at every transfer. All, to be sure, as yet exists in promise; but the believer in promises calculates the aggregate as solid capital….
“Speculative and dreaming … men … relate their dreams and projects to the ignorant and credulous, dazzle them with golden visions, and set them maddening after shadows. The example of one stimulates another; speculation rises on speculation; bubble rises on bubble….
“Speculation … casts contempt upon all its sober realities. It renders the [financier] a magician, and the [stock] exchange a region of enchantment…. No ‘operation’ is thought worthy of attention that does not double or treble the investment. No business is worth following that does not promise an immediate fortune….
“Could this delusion always last, life … would indeed be a golden dream; but [the delusion] is as short as it is brilliant.
After this he adds:
That was not written by Martin Wolf of the Financial Times or Paul Gigot of the Wall Street Journal or David Brooks of the New York Times or Lee Cullum in the Dallas Morning News. It was written by Washington Irving in his famous Crayon Papers about the Mississippi Bubble fiasco of 1719.
Yeah 1719! And we clamour so much that this is modern financial system, need to make policies for developing a modern financial system etc etc. And how different this crisis is. No wonder, Rogoff and Reinhart said in a paper -Is subprime crisis any different? It takes a crisis for us to realise that it is less to do with modernism and fancy techniques, but more to do with basics. And latter is seldom in place.