From The Alan Greenspan Dept. of 20-20 Hindsight

With only a couple of weeks left in office, Hank Paulson has been busy holding interviews to make his views on the financial crisis clear. Here he is explaining how the Treasury lacks sufficient authority to deal with financial crises. Here he is again two days later explaining how macroeconomic imbalances are the true, underlying cause of our recent financial mess. (For a basic run down on the imbalances issue, see my previous essay).

Now, Hank Paulson is absolutely correct in pointing to the imbalances as a source of cheap credit that led to excessive risk-taking. But as my co-author rightly pointed out, it is almost as if Paulson is blaming a concept for the crisis, not unlike those who blame "globalization" for all the world's ills:

"Aha!," say the Americans, "it was those pesky imbalances that made us run huge national deficits and unsustainable personal debt." "It's not our fault either!," retort the Chinese, "those imbalances forced us to manipulate our currency in order to sustain a massive trade surplus." "Don't look at me!," says the investment banker, between Manhattans. "What did you expect me to do with all that cheap credit? Monitor who was holding all that risk?" "Why are we burning through cash at a rate of billions per month after operating for three decades with an unsustainable business model?" asks GM's CEO on conference call from his private jet, "Why, it was the, er... macrosomething imbalances!"

You get the idea. The reality is that the economic imbalances are the culmination of the decisions of governments and individuals over an extended period of time that were self-interested and ignored the bigger picture. The imbalances equation has a savings glut and investment drought on one side, and a collection of irresponsible financial incentives on the other. Ultimately, this situation has been brought on by the unwillingness of the world's major financial actors to take responsibility for the long run implications of their actions. A quote from The Economist:

"A sound international economic order cannot be built on the assumption that the rumbustiously richest country will go on borrowing unprecedented amounts at enormous interest rates from everybody else for ever.”

And yet that's pretty much the model we've been working from (except with low, instead of high interest rates). Oh, and where did I take that quote from? The Economist's 1984 endorsement of Ronald Reagan for president. Twenty. Four. Years. Ago. These imbalances did not creep up on us, folks. We need coordinated action by the G20 economies to address the problem without resorting to protectionist measures. It's too bad we needed a recession to drive this point home to the Secretary of the Treasury, but there you have it.