What Caused the Crash of 2008?

The article below says that Romney and Gingrich are wrong to pin the blame on government housing policies. It implies that the real blame lay with corporate “greed.”

Ironically, it quotes US Federal Reserve officials disputing that housing policy underlay the crisis.

This is ironic because it is actually Federal Reserve actions, in particular the printing of far too many new dollars over the preceding decade, that was the principal reason for the Crash. Government housing policies in the Bush administration and especially in Congress, also contributed to it.

Did corporate “greed” play no role? Well, consider this. Bankers do not suddenly become greedy. If they are greedy, they are greedy all the time, but  we don’t get these crises all the time. So why did the crisis come when it did.

George Bush famously said that Wall St “got drunk.” But to get drunk, somebody has to provide the liquor, and that is exactly what the Federal Reserve did, first under Greenspan and then under Bernanke. The liquor in this case took the form of virtually free credit (interest rates below the rate of inflation), engineered by printing all the new dollars and sending them into the banking system. Those new dollars had to go somewhere. In the late 1990’s, they went among other places into corporate stock buyback and dot com investments which sent the stock market soaring. After stock values eventually crashed in 2000, the new dollars went above all into housing, creating yet another bubble and then resounding Crash.

Along the way, as he kept blowing up the bubble, current Fed chairman Bernanke kept reassuring everyone that there was no subprime loan problem or any other problem.

Not a word of this is mentioned in the Bloomberg article. But this is no surprise. Mayor Bloomberg approves of Fed policy.

Click here for the story.

Hunter Lewis 12-21-2011

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About Hunter Lewis

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Hunter Lewis is co-founder of AgainstCronyCapitalism.org. He is co-founder and former CEO of global investment firm Cambridge Associates, LLC and author of 11 books on moral philosophy, psychology, and economics, including the widely acclaimed Are the Rich Necessary? (“Highly provocative and highly pleasurable.”—New York Times). He has contributed to the New York Times, the Times of London, the Washing­ton Post, and the Atlantic Monthly, as well as numerous websites such as Forbes.com, Fox.com, RealClearMarkets.com, and Townhall.com. His most recent books are Economics in Three Lessons & One Hundred Economic LawsCrony Capitalism in America: 2008–2012, and Where Keynes Went Wrong. He has served on boards and committees of fifteen leading not-for-profit organizations, including environmental, teaching, research, and cultural and global development organizations, as well as the World Bank.