Why the Economy Has Collapsed

Joseph E. Stiglitz , a Nobel Prize–winning economist and a professor at Columbia University, wrote an insightful analysis of key mistakes that were made by policy-makers under Reagan, Clinton, and Bush II and one national delusion that led us to where we are in our economy. Anyone who thinks that our current predicament is merely the natural order of things needs to read this article. Here are some excerpts.

Was there any single decision which, had it been reversed, would havechanged the course of history? Every decision-including decisions not to do something, as many of our bad economic decisions have been-is a consequence of prior decisions, an interlinked web stretching from the distant past into the future. You'll hear some on the right point to certain actions by the government itself-such as the Community Reinvestment Act, which requires banks to make mortgage money available in low-income neighborhoods. (Defaults on C.R.A. lending were actuallymuch lower than on other lending.) There has been much finger-pointingat Fannie Mae and Freddie Mac, the two huge mortgage lenders, which were originally government-owned. But in fact they came late to the subprimegame, and their problem was similar to that of the private sector: their C.E.O.'s had the same perverse incentive to indulge in gambling.

The truth is most of the individual mistakes boil down to just one: abelief that markets are self-adjusting and that the role of government should be minimal. Looking back at that belief during hearings this fall on Capitol Hill, Alan Greenspan said out loud, "I have found a flaw." Congressman Henry Waxman pushed him, responding, "In other words, you found that your view of the world, your ideology, was not right; it was not working." "Absolutely, precisely," Greenspan said. The embrace by America-and much of the rest of the world-of this flawed economic philosophy made it inevitable that we would eventually arrive at the place we are today.