Page 32 - Accelerating out of the Great Recession

THE DAMAGED ECONOMY

uation of the bubble. We all know about the problems of asym-
metry between the employees of the banks—who wrote the
business and were well remunerated—and the banks that car-
ried the risk; we know about the mortgage brokers who origi-
nated business and did not care about its viability; we know
about naive (or greedy) consumers, pushy investors seeking
enhanced returns, compromised rating agencies, and sharehold-
ers who did not hold management to account; and we also
know about governments and central banks that were only too
happy to see a long-lived expansion of the economy with low
inflation and high employment.
But the opportunity to make money seemed too good to
miss—or simply one for which banks felt obliged to keep up
with the competition. As former Citigroup CEO Chuck Prince
put it in the summer of 2007, “As long as the music is playing,
you’ve got to get up and dance.” 3
All these factors notwithstanding, however, it is not clear that
a crisis could have been averted even with a superior “systemic
risk” regulator in place (unless that regulator could have
reversed global trade imbalances and demographic aging). At a
certain point, the crisis was likely inevitable—and, worryingly,
as we discuss later, the underlying dynamics remain in place.
Financial market structure and regulatory reforms will not be
sufficient to address issues that emanate from the real economy.
So there is a very real risk that the next bubble will build up and,
in doing so, present a renewed danger for the real economy.
Furthermore, some of the underlying dynamics that con-
tributed to the property bubble remain. U.S. trade deficits created
excess investable dollars in countries that ran a surplus, and much
of it was allocated to fixed-income assets. At the same time, the
baby boomers, approaching retirement, put a growing proportion

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