Tuesday, February 3, 2009

What Really Caused the Current Economic Crisis?

Alan Greenspan

This photograph is in the public domain.

Was it greed? A real estate bubble? Too much consumer debt? How did a problem in the $200 billion dollar sub prime real estate market lead to the collapse of the global economy?

These are difficult questions, and the single best explanation I have found is that of Dr. Peter Chojnowski in his article, "The Fall of the Phantom Assets: Economic Autumn 2008.".

This article lays the blame most notably on a philosophy of "win-win" capitalism: the notion that after the fall of the Soviet empire the world was in a new economic age, where the old rules didn't apply and risk had been abolished. Whenever the economy would slow down or begin to correct, the Fed would lower interest rates and inject liquidity into the system. This process inflated the asset bubble repeatedly over Alan Greenspan's tenure as Chairman and led to its ultimate collapse.