Alan Greenspan’s Age Of Innocence

Alan Greenspan: Japan in recent years has had to struggle back from the stock-market and real estate crash of 1990. Japanese banks became heavily invested in loans backed by real estate as collateral, as real estate prices soared. When the turn came and prices cascaded downward, the collateral became inadequate. But instead of calling the loans, as most Western banks would do, the bankers refrained. It took years and many government bailouts before real estate prices stabilized and the banking system returned to normal lending, with realistic estimates of bad loans and, hence, capital.
I concluded from this that Japan behaved differently from other capitalistic countries.

Really? Sounds fairly familiar.

Thin Ice

Paul Volcker: So I think we are skating on increasingly thin ice. On the present trajectory, the deficits and imbalances will increase. At some point, the sense of confidence in capital markets that today so benignly supports the flow of funds to the United States and the growing world economy could fade. Then some event, or combination of events, could come along to disturb markets, with damaging volatility in both exchange markets and interest rates.
What I am talking about really boils down to the oldest lesson of economic policy: a strong sense of monetary and fiscal discipline.

Volcker wrote that in 2005, central bankers and government ignored him then as they do today.