John Tamny, the editor of realclearmarkets.com, offered a radical reinterpretation of the financial and economic crisis in the final session of the Fund Strategy Investment Summit in St Moritz.
He argued that the debasement of the dollar, rather than loose monetary policy, was to blame for the American house price bubble earlier this decade. After financial institutions began encountering problems, the economic crisis was exacerbated by the American authorities’ unwillingness to allow companies to fail.
Tamny lambasted the American authorities for their “horrific and irresponsible oversight of the dollar”. For him, this was central to the malaise because “the dollar is the most important price in the world economy”.
Individuals rushed into buying houses, Tamny argued, because of fears about the value of the dollar. “When currencies weaken, people want to buy hard assets,” he said.
Several factors were blamed for the debasement of the dollar under the presidency of George W Bush. Three successive treasury secretaries talked down the value of the currency. In addition, Bush’s selective use of tariffs undermined faith in the dollar, as did uncertainty around the terrorist attacks of September 11, 2001.
“When the unit of account weakens, there’s a flight to the real,” said Tamny.
His explanation contrasts with the mainstream view that blames lax American monetary policy for the housing bubble. Supporters and critics of Alan Greenspan, then chairman of the Federal Reserve, argue that interest rates became too low on his watch. But Tamny countered that the historical record shows no correlation between low interest rates and strong property price performance.
Tamny described how the housing bubble eventually led financial institutions into difficulties. But the problems were compounded by the unwillingness of the authorities to allow troubled financial institutions to fail. “When you save banks, you create cancerous cells that destroy the whole system altogether,” he said. He rejected the view that allowing a large bank to fail would have had a disastrous effect on the sector.
To conclude, Tamny argued that the dollar should be abandoned as the global reserve currency, to be replaced by a British-eurozone or Chinese-Japanese currency. Alternatively, Tamny prefers a gold exchange standard of the type established in 1944.