“THE ANATOMY OF A MURDER: WHO KILLED AMERICA’S ECONOMY?” Joseph Stiglitz Critical Review June 2009, Vol.21 Issue 2 & 3
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. The search is on for whom to blame for the global economic crisis. It is not just a matter of vindictiveness; it is important to know who or what caused the crisis if one is to figure out how to prevent another, or perhaps even to fix this one. The notion of causation is, however, complex. Presumably, it means something like, “If only the guilty party had taken another course of action, the crisis would not have occurred.” But the consequences of one party changing its actions depend on the behavior of others; presumably the actions of other parties, too, may have changed. Consider a murder. We can identify who pulled the trigger. But somebody had to sell that person the gun. Somebody may have paid the gunman. Somebody may have provided inside information about the whereabouts of the victim. All of these people are party to the crime. If the person who paid the gunman was determined to have his victim shot, then even if the particular gunman who ended up pulling the trigger had refused the job, the victim would have been shot: Someone else would have been found to pull the trigger. There are many parties to this crime— both people and institutions. Any discussion of “who is to blame” conjures up names like Robert Rubin, co-conspirator in deregulation and a senior official in one of the two financial institutions into which the American government has poured the most money. Then there was Alan Greenspan, who also pushed the deregulatory philosophy; who failed to use the regulatory authority that he had; who encouraged homeowners to take out highly risky adjustable mortgages; and who supported President Bush’s tax cut for the rich,—making lower interest rates, which fed the bubble, necessary to stimulate the economy. But if these people hadn’t been there, others would have occupied their seats, arguably doing similar things. There were others equally willing and able to perpetrate the crimes. Moreover, the fact that similar problems arose in other countries—with different people playing the parts of the protagonists—suggests that there were more fundamental economic forces at play. The list of institutions that must assume considerable responsibility for the crisis includes the investment banks and the investors; the crediting agencies; the regulators, including the S.E.C. and the Federal Reserve; the mortgage brokers; and a string of administrations, from Bush