The Queen and the Maestro

An interesting feature-length documentary that came out last year, called "The Queen of Versailles",  should make every central banker think twice about the supposed benefits of rock-bottom interest rates.  The movie centres on a developer by the name of David Siegel, who grew the largest timeshare empire in the world, Westgate, largely on the back of cheap money.  Egged on by his much younger wife, a living miracle of silicone and botox and a mother of seven children, he tapped the banks up even further to build "Versailles", intended to be the largest home in America at 91,000 square feet.

Then the financial crisis hit.  All of a sudden the money dried up.  Siegel's business came to a screeching halt, because his model only worked as long as the kind of people who buy timeshares could get access to cheap money.  He had to fire almost all of his sales staff, while trying to conceal from the existing buyers the news that his bank was attempting to foreclose on his flagship property, a blue glass monstrosity in Las Vegas.  And to his wife's horror, work on Versailles came to a standstill.

At the end of the movie, with the Vegas property out of his control and Versailles slowly crumbling, Siegel muses quietly to the camera:  "I developed 28 resorts.  If I'd just stopped at 15, we'd still be all right today".

There you have it.  The combination of cheap money and capitalist greed is a powerful one, both for good and for ill.  The longer you keep throwing cheap or free money at people, even successful ones like David Siegel, the less sensibly they'll use it.  And if their plans have no rationale other than to take advantage of the cheap money, then taking that money away will cause things to fall apart very quickly indeed.

I've criticised the Toronto Star's financial columnist, David Olive, a few times recently, but over the weekend he published a very good piece about why the continuing flood of cheap money provided by central banks is failing to get the global economy moving again. The financial crisis was largely caused by cheap money, under the leadership of "Maestro" Alan Greenspan, so it was never easy to believe that the solution to the crisis would lie primarily in a whole lot more of the same.

QE and all that were rushed into being as measures to cope with a dire financial emergency.  Half a decade on, they're still with us.  That can only mean that the central banks lack all confidence in the economy -- and if they feel that way, how can businesses be expected to feel any different?

So, Messrs Greenspan and Bernanke and King -- you got us into this.  Any ideas how to get us out?  If you do,  David Siegel and his spendthrift spouse would love to hear from you.