Alan Greenspan’s perpetual bailouts in the face of even the smallest crises have made us a world of wimps, says Stephen Roach of Morgan Stanley. And until we toughen up and realise that the world won’t end if we take our medicine, we’ll be doomed to repeat Greenspan’s mistakes.
We need to have another “Volcker moment.” We need to announce that we’re going to be raising the Fed Funds rate back to 2% in 50 basis-point increments over the next 18 months, starting as soon as the European crisis has stabilised.
Volcker didn’t kill the world when he raised short-term rates to 19% in 1981–he saved it. And now we must do the same.
The pace and severity of financial crises has taken an ominous turn for the worse. Over the past 30 years, a crisis has occurred, on average, every three years. Yet, now, only 18 months after the meltdown of late 2008, Europe’s sovereign debt crisis has hit with full force. With one crisis seemingly begetting another, and the fuse between crises now getting shorter and shorter, the world economy is on a very treacherous course.
Each crisis has its poster child – from Thailand, to dot-com, to subprime. But they all have one thing in common – easy money. The “Greenspan put” – the notion that central banks would be quick and aggressive in backstopping financial market disruptions – was the short-term anaesthetic that repeatedly set the stage for the next crisis.