Cheap Fed Money Turned Wall Street Into Pavlov?s Dog: Interview

?Monetary policy is like Pavlov and his dog,? says George Cooper, a London fund manager whose book, ?The Origin of Financial Crises,? shows how muddled central bankers contributed to the meltdown.

Ivan Pavlov trained a hungry dog to salivate at the ring of a bell; cheap money conditioned banks to use ever more leverage, creating an asset bubble that inevitably burst.

This is getting lost, Cooper says, amid the uproar over $165 million in bonuses at American International Group Inc. and the annual pension of 703,000 pounds ($1 million) that Royal Bank of Scotland Group Plc granted to former chief executive Fred Goodwin, whose Edinburgh home was just vandalized.

?People are understandably upset about the bonuses at AIG and Fred Goodwin?s pension,? says Cooper, 40, a fixed-income fund manager at BlueCrest Capital Management Ltd. in London. ?But it?s distracting us from much bigger questions.?

During a lunch and follow-up phone interview, we discussed the economy, the Obama administration?s $1 trillion plan to remove distressed assets from banks, and his book, which argues that the U.S. Federal Reserve and other central banks follow Milton Friedman?s economic theories in good times and turn Keynesian as soon as the going gets rough.