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The problem is not that "there were no warnings" or that the warnings that there were were "pious" or perfunctorily made by people whose job it is to sound grave and prudent. The problem is that, when well-placed individuals even at the top of the regulatory/policy apparatus saw that there was an imbalance and warned about it, they still believed that the best policy response was to leave the market to its own devices. As if saying "tsk, tsk" were enough to make speculators think twice about the soundness of their business decisions. To give an example not involving the US economy or Greenspan, consider Hungary's foreign-currency consumer loans. I wrote
What is remarkable is that the same causes of the currency fluctuations were quoted back then (large amounts of loans in foreign currencies) and nobody has done anything about it. Our friend Ambrose again (he seems to be the only one to have talked about that mythical unpublished report "deja vu all over again" from the IMF).
Borrowers have rushed to take out loans in francs and other currencies, but murmurs over the exchange risks are growing, reports Ambrose Evans-Pritchard in Budapest (21 Sep 2006)


Over 60pc of total loans to businesses and households are now in foreign currencies, and damn the exchange risk. Though Hungary is the region's pioneer with some $2bn a year in Swiss franc loans, Poland, Croatia, Romania, and lately Turkey are catching up fast. This is Europe's "carry trade", every bit as creative as the better-known yen trade that has juiced the world's asset markets with liquidity at near zero interest rates from the Bank of Japan.


"There is nothing we can do to stop foreign exchange borrowing, and we don't even try. As members of the European Union, we have to respect the free flow of capital," he [Hamezc Istvan, director of Hungary's Central Bank] said.

The Central Banker blames the government '4 years ago' (that would be 2002) for making a mess of the economy. Who was in power in 2002? A fistful of Euros also carried the story.
(my emphasis) Here's another regulator who sees his country's private borrowers engage in a carry trade and, what does he say? "There is nothing we can do".

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Tue Sep 22nd, 2009 at 09:47:18 AM EST
[ Parent ]
No argument from me on that, except to point out that the regulator in the example is presumably himself competent/trained/got some degree in economics, and that the important bit is the blind assumption that the market would work out the problem if left undisturbed. This conventional wisdom is the fruit of years of economic orthodoxy that a few sincere and a few less sincere voices did not break through.
by afew (afew(a in a circle)eurotrib_dot_com) on Tue Sep 22nd, 2009 at 04:21:23 PM EST
[ Parent ]


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