Financial Crisis: The Fall of the House of Cards

Publication Date: February 2010

Publisher: National Center for Policy Analysis (U.S.)

Author(s): Laurence J. Kotlikoff

Research Area: Economics

Keywords: financial crisis; economy

Type: Report

Coverage: United States

Abstract:

Each financial crisis is different, yet they all feature financial institutions making promises they cannot keep. The conventional explanation for the 2008 financial crisis and recession is that it was caused by a housing bubble, spurred by the Federal Reserve's low interest-rate policy and by lax regulatory oversight. All three claims may be true, but they do not identify the underlying institutional cause.

The federal government's strategy to contain the financial meltdown is to fight each fire one-by-one and rebuild the old system pretty much as was: socialize the risks (having the public take the hit when things go south) and privatize the profits (banks earn big fees when the economy generates high investment returns). This treats the symptoms, not the disease, and will leave the country financially weaker.