CLE Materials for Panel #1 - George Washington University Law ...

WILMARTH
4/1/2011 1:11 PM
976 OREGON LAW REVIEW [Vol. 89, 951
to the dotcom-telecom bust in the stock market between 2000 and
2002 and the bursting of the housing bubble after 2006. 91 A recent
European Central Bank staff study found that lax monetary policy in
the United States and the euro area produced a prolonged period of
low, short-term interest rates in both regions between 2002 and 2006.
The study concluded that “too low for too long monetary policy rates,
by inducing a softening of lending standards and a consequent
buildup of risk on banks’ assets, were a key factor leading to the
financial crisis” on both continents. 92
Second, during the past decade several Asian nations that were
large exporters of goods (including China, Japan, and South Korea)
maintained artificially low exchange rates for their currencies against
the dollar, the pound sterling, and the euro. Those nations preserved
advantageous exchange rates for their currencies (thereby boosting
exports) by purchasing Western government securities and investing
in Western financial markets. In addition, many oil-exporting
countries invested large amounts in Western assets. Thus, nations
with significant balance-of-trade surpluses provided large amounts of
credit and investment capital that boosted the value of Western
currencies, supported low interest rates, and thereby promoted asset
booms in the United States, the United Kingdom, and other European
countries. 93
Third, Robert Shiller and others have argued that “bubble thinking”
caused home buyers, LCFIs, CRAs, investors in structured-finance
securities and regulators to believe that the housing boom would
continue indefinitely and “could not end badly.” 94 According to these
91 For critiques of the FRB’s monetary policy, see Wilmarth, supra note 4, at 1005–06
(summarizing analysis by various critics of the FRB); JOHN B. TAYLOR, GETTING OFF
TRACK: HOW GOVERNMENT ACTIONS AND INTERVENTIONS CAUSED, PROLONGED, AND
WORSENED THE FINANCIAL CRISIS 1–6, 11–13 (2009) (contending that the FRB’s “extraeasy
[monetary] policy accelerated the housing boom and thereby ultimately led to the
housing bust”); KLING, supra note 74, at 38–39. For an impassioned attack on the FRB’s
monetary policy between the mid-1990s and 2005, see WILLIAM A. FLECKENSTEIN &
FREDERICK SHEEHAN, GREENSPAN’S BUBBLES: THE AGE OF IGNORANCE AT THE
FEDERAL RESERVE (2008).
92 Maddloni & Peydró, supra note 4, at 9–10, 14–15, 25–26 (quote at 25).
93 For discussion of the impact of large purchases of Western government securities and
other investments in Western financial markets by Asian nations and oil-exporting
countries, see MORRIS, supra note 46, at 88–104; Wilmarth, supra note 4, at 1006–07;
Astley et al., supra note 56, at 180–82.
94 ROBERT J. SHILLER, THE SUBPRIME SOLUTION 48–54 (2008); see also MORRIS,
supra note 46, at 65–69; Astley et al., supra note 56, at 181; Wilmarth, supra note 4, at
1007–08.