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The Adam Smith Institute Blog

Fabulous Fab and Goldman Sachs being blamed, but government at fault

By Dr. Eamonn ButlerGuest blogger / April 27, 2010

Fabrice Tourre, executive director, Goldman Sachs Structured Products Group Trading, prepares to testify on Capitol Hill in Washington, before the Senate Investigations subcommittee.

Charles Dharapak/AP

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So a Goldman trader allegedly sold a security which other members of the bank were betting against. Duplicitous? Or maybe careless? Maybe one hand didn't know what the other was doing. But the authorities know full well what they are doing: keeping up the pressure to push the 'guilt' firmly away from themselves.

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Since the US Savings & Loans crisis in 1985, through the 1987 stockmarket crash, through the Russian default, through 9/11/2001, the US and UK monetary authorities in particular responded by flooding the world with cheap credit. Business bounced back each time, and everyone cheered. But cheap credit makes every investment work: even bad investments. When interest rates were cut from 6.25% to just 1% after 9/11, houses in the US suddenly became six times more affordable. Everyone rushed to take loans and buy houses. They figured they couldn't lose. It was like being in a poker game when the government was handing out free gaming chips.

And everyone coined it – at least until the US and UK authorities realized, in 2006/07, that they had overdone things, and suddenly reined back – leaving the financial system short of funds for its daily business, and precipitating the loss of trust and the inevitable bust that always follows such fake, monetary booms.

Regulation made things worse. UK and US banking regulation is over-detailed and over-costly. So firms have to be large in order to afford the compliance staff to deal with it. That has prompted round after round of consolidations and mergers. It has helped produce the growth of mega-banks, like Goldman Sachs, of course. That has greatly increased the risk of systemic failure. But the regulators did not even see the systemic risks in the giantism they were creating and the cheap money policies of the Fed and the Bank of England.

The authorities and politicians are keen to blame the bankers for the crisis. And no doubt they will self-righteously go after the banks with more cases after this one. But maybe it is they who should take the blame.

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