Sunday, January 4, 2009

The Economy Crumbled
By Andrew Leonard
Jan. 2, 2009

Of all the economic earthquakes that racked the global economy in 2008, one temblor ranks supreme. Alan Greenspan's declaration to Congress on Oct. 23: "I made a mistake."

In those four words can be heard the crumbling of at least three decades of ideological dominance. Technically speaking, Greenspan was acknowledging that he had misjudged the private sector's ability to manage risk in a largely deregulated environment.

In 2008, we witnessed a market failure of epic proportions. Whatever moral authority the [unfettered free market] deregulators thought they might have had -- that sense of superiority that came from the calm confidence that their interpretation of how the world works is the correct one -- is gone.

The story of how a particular kind of mortgage loan proved to be the undoing of Wall Street and the catalyst for the end of a period of sustained global economic growth is at once insanely complex and, by now, almost too familiar. We now know that dereliction of duty ran rampant at every step of the chain. Mortgage borrowers lied about their income. Mortgage lenders failed to check the credit-worthiness of borrowers. Banks restructured loans into derivative instruments that obscured the underlying liabilities. Credit rating agencies -- dependent on fees from the very institutions whose products they were supposed to be judging -- gave the newfangled securities gold-plated ratings. Government regulators looked the other way. We now know that the incentives built into the system encouraged every individual actor to act in defiance of economic rationality.

We now know, in other words, that left to themselves, economic actors do not pursue rational, sustainable courses of action. Greed and self-interest will steer you into the ditch every time.

How did we get here?

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