Five Critical Decisions Leading to Our Financial Crisis: Joe Stiglitz Presents His Analysis

10 December 2008
Five Critical Decisions Leading to Our Financial Crisis: Joe Stiglitz Presents His Analysis
by Jesse at http://jessescrossroadscafe.blogspot.com/
This is a benchmark document, a starting point, for finding our way out of the wilderness.

It validates the points that quite a few economic bloggers have been making for some time, with great effect because of Joe Stiglitz' reputation and accomplishments in his field.

Here is a summation of the Five Major Causes of our financial crisis. As Joe so correctly observes:

"What were the critical decisions that led to the crisis? Mistakes were made at every fork in the road—we had what engineers call a “system failure,” when not a single decision but a cascade of decisions produce a tragic result. Let’s look at five key moments."
Reagan's nomination of Alan Greenspan to replace Paul Volcker as Fed Chairman

The Repeal of Glass-Steagall and the Cult of Self-Regulation

Bush Tax Cuts for Upper Income Individuals, Corporations, and Speculation

Failure to Address Rampant Accounting Fraud Driven by Excessive and Flawed Compensation Models

Providing Enormous Bailouts to the Banks without Engaging Systemic Reform for the Underlying Causes of the Failure

There are other points that might be added, some that are not strictly financial in nature.

1. An international monetary exchange system that facilitates manipulation to create de facto barriers and subsidies in support of industrial trade policies. This creates destabilizing surpluses and deficits which may be the source of the next stage of the financial crisis.

2. The concentration of the ownership of the mainstream media in a handful of corporations has had a chilling effect on the newsrooms and commentators.

3. The lack of Congressional courage in exercising its obligations with regard to the extra-Constitutional excesses of the Executive Office. Certain mechanisms and instruments that facilitate the unilateral exercise of presidential power are tipping the balance of powers.

4. The existing system of funding inordinately expensive political campaigns is a breeding ground for favors and corruption.

The undue influence on prices, particularly global commodity prices, that is exercised by a handful of US banks operating far outside of traditional banking charters. This is a dangerously destabilizing influence on the real world economy and industrial growth and investment. A significant step forward would be the imposition of position limits, greater and more timely transparency for those with more than 10% of any market's open interest, and an uptick rule with stronger enforcement against naked shorting and other forms of short term price manipulation.