I know its late Friday and I’m sorry for the rant but a headline across the tape forced my hand. From a speech on June 25th to the BIS that the Fed officially released today, Fed Vice Chairman Kohn said that “the root cause of our problems was the underpricing of risk as the financial sector interacted with nonfinancial sectors” and that “leverage was a symptom rather than a cause of the underlying crisis.” He has a Ph.D and I don’t but I want to correct him that easy money policy under Greenspan that had the fed funds rate at 1% for way too long was the root cause of the crisis and the underpricing of risk was just another symptom. With rates artificially low, meeting required rates of return got more difficult. Whether one is a pension fund, an insurance company, mutual fund, hedge fund, etc… in order to get higher returns in this kind of environment, one had to take on more risk and leverage in order to goose returns. The result of course was a massive misallocation of capital and an underpricing of risk and we all know the chapters that followed. It’s amazing that with all of us having the same sets of facts we come to different conclusions but the Fed refuses to take any responsibility for what occurred.
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