THE ANATOMY OF A MURDER: WHO KILLED AMERICA'S ECONOMY?

ABSTRACT

The main cause of the crisis was the behavior of the banks—largely a result of misguided incentives unrestrained by good regulation. Conservative ideology, along with unrealistic economic models of perfect information, perfect competition, and perfect markets, fostered lax regulation, and campaign contributions helped the political process along. The banks misjudged risk, wildly overleveraged, and paid their executives handsomely for being short‐sighted; lax regulation let them get away with it—putting at risk the entire economy. The mortgage brokers neglected due diligence, since they would not bear the risk of default once their mortgages had been securitized and sold to others. Others can be blamed: the ratings agencies that judged subprime securities as investment grade; the Fed, which contributed low interest rates; the Bush administration, whose Iraq war and tax cuts for the rich made low interest rates necessary. But low interest rates can be a boon; it was the financial institutions that turned them into a bust.

Notes

1. Greenspan supported the 2001 tax cut even though he should have known that it would have led to the deficits which previously he had treated as such an anathema. His argument that, unless we acted now, the surpluses that were accumulating as a result of Clinton's prudent fiscal policies would drain the economy of all of its T‐bills, which would make the conduct of monetary policy difficult, was one of the worst arguments from a respected government official I have ever heard; presumably, if the contingency he imagined—the wiping out of the national debt—was imminent, Congress had the tools and incentives with which to correct the situation in short order.