The best analysis to date of the short-term causes of the crisis

Here is IMO a must-read for anyone interested in the short-term causes of this financial crisis.  The long-term buildup of debt guaranteed problems for America, but a long series of public policy errors produced a severe crisis.  I recommend clicking on the link to read it in full.

Capitalist Fools“, Joseph E. Stiglitz, Vanity Fair, January 2009 — “Behind the debate over remaking U.S. financial policy will be a debate over who’s to blame. It’s crucial to get the history right, writes a Nobel-laureate economist, identifying five key mistakes-under Reagan, Clinton, and Bush II-and one national delusion.”

From Wikipedia:  “Joseph Eugene Stiglitz  is an American economist and a professor at Columbia University. He is a recipient of the John Bates Clark Medal (1979) and the Nobel Memorial Prize in Economic Sciences (2001). He is also the former Senior Vice President and Chief Economist of the World Bank.


There will come a moment when the most urgent threats posed by the credit crisis have eased and the larger task before us will be to chart a direction for the economic steps ahead. This will be a dangerous moment. Behind the debates over future policy is a debate over history-a debate over the causes of our current situation. The battle for the past will determine the battle for the present. So it’s crucial to get the history straight.

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.

  1. Firing the Chairman 
  2. Tearing Down the Walls
  3. Applying the Leeches
  4. Faking the Numbers
  5. Letting It Bleed

The administration talked about confidence building, but what it delivered was actually a confidence trick. If the administration had really wanted to restore confidence in the financial system, it would have begun by addressing the underlying problems-the flawed incentive structures and the inadequate regulatory system.

Was there any single decision which, had it been reversed, would have changed 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 actually much lower than on other lending.) There has been much finger-pointing at Fannie Mae and Freddie Mac, the two huge mortgage lenders, which were originally government-owned. But in fact they came late to the subprime game, 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: a belief 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.


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To read other articles about these things, see the FM reference page on the right side menu bar.  Of esp relevance to this topic:

Post on the FM site about diagnosis, causes, and the larger context of the crisis:

  1. The post-WWII geopolitical regime is dying. Chapter One, 21 November 2007 — Why the current geopolitical order is unstable, describing the policy choices that brought us here.
  2. Diagnosing the eagle, chapter I — the housing bust, 6 December 2007
  3. Death of the post-WWII geopolitical regime, III – death by debt, 8 January 2008 – Origins of the long economic expansion from 1982 to 2006; why the down cycle will be so severe.
  4. Let us light a candle while we walk, lest we fear what lies ahead, 10 February 2008 – Putting the end of the post-WWII regime in a larger historical context.
  5. A vital but widely misunderstood aspect of our financial crisis, 18 September 2008 — Too many homes.
  6. A picture of the post-WWII debt supercycle, 26 September 2008
  7. Debt – the core problem of this financial crisis, which also explains how we got in this mess, 22 October 2008
  8. Causes of the financial crisis (no, its not the usual list), 29 October 2008
  9. Government policy errors and the Great Depession, 1 November 2008  

27 thoughts on “The best analysis to date of the short-term causes of the crisis”

  1. This is an excellent summary, which finally lays the blame on a flawed economic philosophy of unregulated financial markets. May this philosophy join “trickle down economics” in the dust-bin of discredited theory!

    Greenspan’s reputation as a lofty financial guru always seemed ludicrous to me. In Martin Mayer’s book on the Savings and Loan crisis, the Washington insider whose letter of recommendation helped the infamous Charles Keating obtain the charter for his Lincoln Savings and Loan was none other than Alan Greenspan. In the letter he attests to Keating’s “sound business practices” and upright character. Greenspan was nothing more than an errand-boy for money and power.

  2. I can’t help wondering if we have lost sight of Henry Ford’s wisdom when he ushered in the consumer industrial age with the Model T. Pay the workers well enough that they can afford your product! This synergy between producers and consumers assures a balanced and productive economy. The last couple of decades have seen a growing disparity between consumers and producers – between wage earners and the captains of capital. The power of capitalism is embodied in its potential to exploit exponential growth: “them that has, gets.” Allowed to its own devices, capitalism will feed off whatever wealth-generating resources are available. Fish, trees, oil, iron ore, and rich soil have traditionally provide the feedstock for a process that lifts all boats. When natural resources become scarce, the process can begin to devour itself. Capital accumulation continues at the top at the expense of those lower down the economic ladder. Initially, middle class wealth is extracted by static real wages and by a “consumerism” that sends everything that is earned right back to the producers. Recently the process has been extended by allowing the consumers to indenture their future earnings to repay debt. But suddenly the process must grind to a halt because even the future earnings of the middle class have been fully exploited and there is nothing left to feed the beast.

  3. Really what happened here, put simply, is that banks bought a lot of worthless crap. Yes, now it’s clear that that some rule could have stopped them, but without hindsight it’s difficult to regulate bad investments out of the system since there are so many of them.

    Practically what regulation is going to do is make it more difficult to get loans and that’s going to further shut down the economy. Example: Joe wants a car loan, but Joe works for GM and GM looks like might be going bankrupt? Should he get the money? Short term, the system has already way over-adjusted in the direction of holding onto cash. So the fixing the last problem of overly risky investing, is going to make the short term even more difficult.

    I agree with the idea that the incentives are just screwed up. To many otherwise good companies were overloaded with debt that added no additional value other than to make executives rich. I suppose in theory this should have made the banks and lenders rich from all the bond income, but oops, that all evaporated away. Now we’re left with nothing but debt and no wealth anywhere, and zero resilience. Coming 2009 we’re going to watch the US corporate stars fizzle-out, one by one, from all this debt and no sales. It’s going to be spectacular. (Advice to executives: Better to declare the crisis now, and get in on the early bailout money. Later on, there won’t be any left.)

    Could there be some kind of way to regulate a ‘business developing’ loan versus a ‘business killing loan’. Hmm.

    Anyway, that’s a little bit rambling, but I’m in one of those weird moods today.

  4. In my new “Silver Parachutes” book, I describe real incidents of scams and/or mis-management and calculate the dollar losses due to each decision my managers. And in my conclusion, I content that it is a lack or loss of passion that leads to the decisions that caused the crises.

  5. I know what you mean as far as the lack of passion. The Iraq reconstruction and the Katrina relief effort are other aspects of the US inability to do much of anything these days without the kleptocracy sucking the blood out. If we are moving towards US Government owned banks and medical system, we might just see the same problems all over again. All the regulation in the world won’t matter if people aren’t concerned for the goals and long term survival of the institutions they are part of.

  6. More regulation? These guys were and are clever. They invented CDOs to get the “investments” off the books. Give them more/new regulations and they will circumvent them. That’s their job. That’s why they were paid millions. To see how we value people simply look at the differentials between production workers and engineers, versus athletes (read TV revenue enhancers), movie stars, politicians and financial wizards. If you make $50k/year you can’t “actively” value much of anything. If you have $200 million you can “value” pretty much what you want to afford. This is going to get very interesting in 2-3 years when the middle class can no longer afford shelter or food. Unless, of course, there is another financial collapse that “disappears” the $2-3 trillion that’s been created lately.

  7. For perspective, a dollar bill is about 0.003″. Stacked flat, one trillion dollars would encircle the earth’s equator just short of twice. Two and one-half trillion would make it approximately halfway to the moon.

  8. Dr. Stiglitz makes this point at the end of his article:

    “The truth is most of the individual mistakes boil down to just one: a belief that markets are self-adjusting and that the role of government should be minimal. ”

    Now, and perhaps I’m misreading him, but it seems that Dr. Stiglitz is arguing that the belief that markets are self-adjusting is incorrect. I would argue, however, that this crisis is an example of a rather large market self-adjustment, and supports, rather than contradicts, the “self-adjustment” viewpoint. I think he would be better served to make the case that market oscillations should be dampened, rather than trying to eliminate them altogether. The controversy arises, I think, when you try to hit the happy medium between prudent regulation of financial markets and “over-regulation” – an Aristotelean mean if there ever was one. History is riddled with examples of irrational exuberance causing financial crises, from tulip-mania to housing-mania, and I’m inclined to believe that those on “the left” who might believe that – if only those in charge were more clever – we can prevent these things are deluding themselves.

    As an aside, it’s hard for me to take the words of Drs. Stiglitz and Krugman without a large helping of salt, given their propensity to engage in ideological slap fights, Nobel prizes notwithstanding. Can I trust them to give me the whole story, or only the side which helps score points against “the right”?

    First posting, long time reader…thanks for a great blog.

  9. It appears to me that the “self-adjusting” markets were left to themselves – right up to the point that they were about to self-adjust; then we received immediate Federal intervention before any market adjustment could take place. Yes, Lehman was thrown over the back of the sleigh to the wolves, but for big firms that’s about it. The sheer volume of foreclosures would have forced banks to renegotiate loan terms. The banks that accepted bad paper would have taken losses as the market self-adjusted. In a free market you have the privilege of going bankrupt if you make risky and poor decisions – the houses would not disappear, but be repurchased at lower prices. It would be in the best interest of the appointed receivership to maintain residents in such a large number of foreclosed homes. The greedy would have lost money. This is what can happen when you shoot for 10-15% returns instead of 5%. Now we get 1.5%. Anyone know of retirees or jobless trying to survive on current returns on conservative investments now that the Fed has savings account yields down to 1-1.5%?

  10. JD, I somewhat agree. If ‘self-adjustment’ had been allowed to run it course more naturally, most of the megabanks would have gone belly up along with their unnecessary bets, mortgages could have been renegotiated and/or new banks, even nationalised ones, formed to handle all that. The superfluous, parasitical excessive elements of the financial system would have been purged as by a fever. Right now there is still far too much emphasis on propping up this unnecessary and perhaps even criminal superstructure although this is a function of ‘intervention’ versus regulation. Friedman has a good piece on the societal ethic at play underneath all this which I think is perhaps more the level that needs to be addressed than purely the ‘regulatory’ issues alone. It is time to spend more time determining how our ‘economy’ should run in accord with underlying values versus so-called ‘bottom line’ alone.

  11. The tragedy is that information was/is not disclosed quickly and that many, many “investors” did not do due diligence; including funds, pensions, municipalities, etc. We now have the issue of the stonewalling that we are getting from the Fed and Treasury regarding where the first $350,000,000,000 (that’s 350*10×9) has been expended. Information necessary for a free market is being concealed. (Erasmus, I mean no offense, but don’t get me started on Friedman – the man’s ideas are as shallow as the morning dew on the grass.) We are discovering that our corporations and our politics are being run be people that have no concept of working for survival. They have passed the “independently wealthy” state long ago. Unfortunately their judgments are typical of those that have “no worries”. When your $200 million drops to $20 million it’s tough, but you still may be able to make it and take care of your family.
    Fabius Maximus replies: Many of Madoff’s investors were wiped out, losing their entire savings. From wealthy to working stiffs — or unemployed formerly wealthy. This is potentially an important event, a milestone (i.e., of no inherent importance but indicating movement along a road). Regimes seldom collapse by revolt of the peons — but often by loss of confidence in regime by important elements of the ruling elites. That process might be happening right now.

  12. Thanks Fabius, you are quite correct about the _majority_ of regime changes. Considering the concentration of wealth and that the majority of the wealthy employ proxies for the management of their wealth, I fear there is a high potential for the replacement of King Log with King Stork. Our current managements have clearly demonstrated a now critical disconnection with reality. There are exceptions; e.g. Buffet, Gates, etc., but they are few. Regime change through our current two political parties is virtually (actually?) a non sequitur. We shall “live in interesting times.” We have opportunities that have not existed in almost a hundred years.

  13. I do not look on the Stiglitz article as some kind of explanation. It is much more of self serving, you should have listened to me, piece. I keep seeing Stiglitz claim more regulation would have helped the situation, but he is quite non specific on what that regulation should be.

    Stiglitz claims to have wanted regulation of derivatives when he was president of the council of economic advisors, but it is telling that he was unable to convince anyone to listen to him. When he was a VP at the World Bank, he tangled with Summers and ended up being fired. In other words, Stiglitz seems to have trouble convincing people he is correct and getting along with others.

    In spite of JD’s dislike of Friedman, I would take Friedman over a guy like Stieglitz who seems to want more and more government control even though he does not know (or at least will not tell us) what that control should look like.


  14. I also am not a Friedman fan, but I think his latest piece about the ‘business/cultural ethic’ underpinnings is closer to the real subject matter than regulation alone. Regulating what and to what end? Tinkering with means without having clear end in mind is foolish, no matter how complex and brilliant the chosen fixes. It is highly unlikely that such review will transpire in the near future which will continue to feature the same questionable ‘system’ trying to preserve itself.

  15. Josiah Stamp (1880-1941, British civil servant, industrialist, economist, statistician and banker. He was a director of the Bank of England and chairman of the London Midland and Scottish Railway.):

    Banking was conceived in iniquity and was born in sin. Bankers own the earth. Take it away from them, but leave them the power to create deposits, and with a flick of the pen (today a computer keyboard) they will create enough deposits to buy it back again. However, take it away from them, and all the great fortunes like mine will disappear, and they ought to disappear, for this would be a happier and better world to live in. But if you wish to remain the slaves of Bankers and pay the cost of your own slavery, let them continue to create deposits.

    In short, the entire Federal Reserve mechanism established in 1913 whereby the private sector essentially manages the national monetary basis, should be dismantled. Yesterday.
    Fabius Maximus reples: This is absurd. Needless to say this quote appears in none of the histories of the Bank of England or Josiah Stamp that are listed on Google or La Questia. It appears endlessly on various trash sites, fountains of misinformation.

    The author of “Gilligan’s Corner” gives some information about the origin of this.

    I found another book on Google Books entitled “The Monetary Elite vs. the Gold’s Honest Discipline” written by Vincent R. Locascio. On page 25, the author cites Stamp something similar to the above, but footnotes the quote. I checked his references, and the author notes: “Peter Cook, ‘What the Banks don’t want you to know’, 1993. This statement was reportedly made by Josiah Stamp to a group of about 150 history, economics, and social science professors at the University of Texas in the late 1920s. Cook attributes the source of the quote to C.W. Adams, ‘Legalized Crime of Banking’, The Meador Publishing Company, 1957.”

    You can download a copy of Adams’ book here. As most of you have guessed by now, it is just an anecdote. No source given for this bizarre story. We can safely consider this a false quote, unless additional support comes along.

    A profile of Stamp suggests that he is an unlikely candidate to write such an extreme statement:

    {he} was a distinguished British civil servant and economist. Born in 1880, his formal schooling ended before he was 16 years old. He entered the British Civil Service as a clerk and passed by examination swiftly up the official ladder. He continued his education with little formal teaching or guidance and eventually received a doctorate from the London School of Economics and Political Science. Later, he was chairman of the board of governors of the school and a director of the Bank of England. Just short of 39 years of age, he left the Civil Service to join private industry as president of the London, Midland and Scottish Railway. He combined this work in industry with an unbroken succession of public service assignments of various kinds. He was the British representative on the Dawes Committee on German Reparations, and this service made him an outstanding international figure. From the age of 45 onward he was regarded as a principal link in England between the academic world and industry and the government. His honors, official and academic, culminated in the peerage as the first Baron Stamp. Twenty-three honorary degrees were conferred upon him by universities around the world.

    From Control or Fate in Economic Affairs, Robert H. Connery and Eldon L. Jones; Academy of Political Science, 1971.

  16. Yes, self-serving excrement, of a most superficial Stiglitzian variety. Why did he not go back to President Carter’s 1977 Community Reinvestment Act? Why did he not focus more on the Clinton hyper-expansion of the CRA? Why did he not mention the “broken clock” John McCain’s early 2000’s attempt to reform Fannie Mae — which was promptly shot down by Barney Franks, Chris Dodd, and Maxine Waters?

    Stiglitz and the rest of the hyper-statists can not create anything at all. They are only capable of taxing, regulating, and criticizing those who are capable of creating. Fie!
    Fabius Maximus replies: This nonsense has been disproven a dozen times. The references appear several times on this site. The CRA was at most a trivial factor in the housing bubble, and less than trivial in the larger and more important post-1982 growth of US household debt.

    There are hundreds of stories about the lax regulation by Federal and State regulators over the past decade that allowed the US debt problem to spiral out of control, evolving from a problem to a severe crisis. This is just one:

    Banking Regulator Played Advocate Over Enforcer“, Washington Post, 23 November 2008 — “Agency Let Lenders Grow Out of Control, Then Fail.” Excerpt:

    In the summer of 2003, leaders of the four federal agencies that oversee the banking industry gathered to highlight the Bush administration’s commitment to reducing regulation. They posed for photographers behind a stack of papers wrapped in red tape. The others held garden shears. Gilleran, who succeeded Seidman as OTS director in late 2001, hefted a chain saw.

    Gilleran was an impassioned advocate of deregulation. He cut a quarter of the agency’s 1,200 employees between 2001 and 2004, even though the value of loans and other assets of the firms regulated by OTS increased by half over the same period. The result was a mismatch between a short-handed agency and a burgeoning thrift industry.

    He also reduced consumer protections. The other agencies that regulate banks review corporate health and compliance with consumer laws separately, which consumer advocates say helps ensure that each gets proper scrutiny from specialists. Gilleran merged the consumer exam into the financial exam.

    Gilleran did not respond to multiple requests to be interviewed for this article. But at the time he headed the agency, he defended the consolidation of the exams, saying thrifts would be required to conduct “self-evaluations of their compliance with consumer laws.”

    Then-Rep. John J. LaFalce (D-N.Y.), who at the time was the ranking Democrat on the House Financial Services Committee, wrote in a letter to Gilleran that this was “a complete abrogation of the mandate your agency has been given by Congress.”

  17. Regimes seldom collapse by revolt of the peons — but often by loss of confidence in regime by important elements of the ruling elites. (Fabius, referring to the losses of the wealthy via Madoff)

    Who do you think are the principal losers in the current meltdown, and the depression to come? I feel (but don’t know how to prove) that the upper levels of wealth are insulated, even if they’ve lost 25% of their assets.) Some, like Soros and Buffet, have made out (or are in position to.) CEOs of companies whose share values dropped 75% still got their multimillion dollar bonuses.

    On the other hand, very large numbers of middle class workers and retirees have lost a huge amount of their 401Ks and pension funds through the collapse of the stock market. And many more lower class folks are facing stressful times. Although these two groups have traditionally had little real political power, other than the charade of national elections, their combined distress could lead to political change.

    But, I’m curious — who has lost the most wealth in the current crash?
    Fabius Maximus replies: Of course the peons lose the most. Financial downturns usually concentrate wealth, as the middle class is affected most — with no billion-dollar bailouts. So what?

    If God didn’t want them sheared, he would not have made them sheep.

    …….Calvera, bandit leader in the movie “The Magnificent Seven” (1960)

  18. “who lost most” depends on how you mean. If you take Stiglitz’s “tax cuts for the rich”, than of course the rich lost the most (multi-millions instead of multi-thousands). If you take percentages, and especially percentages of ‘wealth above 0 savings social security retiree’, than the middle class lost a higher percentage. So I’d say the middle classes ‘lost more’ … but in the same way that the Bush tax cuts reduced middle class taxes more (many middle class had 50% reductions). Reducing tax for 10 000 to 5 000 instead of from 100 000 to 70 000 is a bigger percentage, but a much smaller amount. On the tax cuts (point 3?), Stiglitz is mostly wrong.

    Stiglitz wrote a book highly critical of the IMF (on the Arginetina crises?), which failed to note that it was his World Bank which often acted in concert with the IMF — he’s becoming a capitalist critique with cred. (Much like the Press loved Republican McCain whenever he criticized Bush.)

    Stiglitz seems to love regulation — but the commie countries that were so regulated in the past failed to do so well. He seems to have no sense for the possibility of over-regulation. I don’t recall the Volker – Greenspan transition as much of a controversy, tho.

    I’m sure Stiglitz is correct about the dominance of the ‘Big Swinging Dick’ (Liar’s Poker) investment bank domination of commercial banks in philosophy. But the Free Market was about to change that: all the Big Banks are insolvent, thanks to their bad bets on those Fin WMDs that their rocket scientists created (with computer models!).
    This bailout is all about NOT letting the market ‘self-correct’, because the bankruptcy of the Big Banks is being judged as too many rich guys losing too much PLUS they will be taking the whole economy with them. I even thought so myself, but am now certain that the economy has too many banks, and it is exactly those Big Banks that had been BSD infected, with the high risk/ high returns over the last decade, which should be wiped out.

  19. The tragedy is that information was/is not disclosed quickly and that many, many “investors” did not do due diligence; including funds, pensions, municipalities, etc.

    You have a point. Maybe the vast funds spent in the disastrous ‘Paulson plan’ were looted by executives, but we aren’t meant to find this out. This thing sure is starting to smell like another ‘Iraq reconstruction’ except at a vastly greater scale. I remember the stonewalling earlier in the subprime disaster, and well, we know how all that went down.

    Regimes seldom collapse by revolt of the peons — but often by loss of confidence in regime by important elements of the ruling elites. That >process might be happening right now.

    Well, something went very very wrong. I think there’s plenty of motivation for changing something. After 2009 is done, the public at large will have witnessed some very bad things, I think. Then it’s going to get interesting.

    So, let’s get started on the ‘new regime’…. My thoughts

    1. Preserve existing companies that have viable products, brands, and technology. Don’t fear bankruptcy. Let these guys go Chapter 11, rescue some percentage of shareholder equity, have the USG invest directly as an equity holder. Enough cash to keep the lights on for a bit, so everyone feels more secure in their jobs. Hold anyone who profited from these big debt deals responsible, and kindly ask them for some of the money back.

    2. Make use of the houses that have been built. We don’t want rows and rows of empty homes, while people live in tent cities. First let the houses find their real value. There are some advantages to cheaper houses. Then, let’s offer about the same deal to home-owners in the sink. They’ll go chapter 11, we wipe out some of the debt, and refinance the houses based on the new value, and keep most of their other assets intact.

    Then, of course, all the banks who own all this stuff will go down in flames because it becomes worthless, but just let it happen. There are plenty of other banks to come in and take their place.

    As of right now, we’re rescuing banks while businesses and homeowners die. And I’m saying we save the homeowners and the businesses, and let the banks die. It’s a better deal, really.

    Course’ it’ll never happen, but this message will be an entertaining read a few years in the future.

  20. For regulation as far as derivatives, honestly, I’m not really sure myself how much derivatives have contributed to the current disaster. The subprime lending and the collapse of the housing market, this is easy for me to understand. But the role derivatives have played in this is not totally clear to me at all.

    I think he has a point on the division of commercial banks and investment banks and some of these other change — but even things like Fannie Mae, Freddie Mac needed bailouts and they were about as close to a US Government Bank as you can get. This article is re-fighting old battles from the last war, and I’m not sure how relavent they really are.

  21. Joe Stiglitz sees this more clearly than anyone except perhaps Barack Obama. Stiglitz absolutely must defer more to President Obama in his future writing. Everything is now in good hands. Rest well.

  22. Woodrow Wilson, who presided over the Federal Reserve Act wrote:

    I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the civilized world no longer a Government by free opinion, no longer a Government by conviction and the vote of the majority, but a Government by the opinion and duress of a small group of dominant men.

    Fabius Maximus replies: This is among the dimmest of the many bogus quotes attributed to authority figures about the Federal Reserve system. Anyone believing this needs to review some basic history, stat, as it is obviously fake.

    Nor is it difficult to determine that it is fake.
    * Google shows it only on advocacy and fringe websites — with no specific citations.
    * It appears in no standard reference works or biography of Wilson that I see on Google books or La Questia.
    * It’s been debunked several times, such as here in Salon by Andrew Leonard on 21 December 2007.

    The opening two sentances are fake, added to two actual quotes is from Wilson’s book “The New Freedom — A Call For the Emancipation of the Generous Energies of a People.” It was published in 1913; Wilson signed the Federal Reserve Act on 13 December 1913. Project Gutenberg makes the text available here.


    A great industrial nation is controlled by its system of credit. Our system of credit is privately concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men who, even if their action be honest and intended for the public interest, are necessarily concentrated upon the great undertakings in which their own money is involved and who necessarily, by very reason of their own limitations, chill and check and destroy genuine economic freedom. This is the greatest question of all, and to this statesmen must address themselves with an earnest determination to serve the long future and the true liberties of men.


    … We are at the parting of the ways. We have, not one or two or three, but many, established and formidable monopolies in the United States. We have, not one or two, but many, fields of endeavor into which it is difficult, if not impossible, for the independent man to enter. We have restricted credit, we have restricted opportunity, we have controlled development, and we have come to be one of the worst ruled, one of the most completely controlled and dominated, governments in the civilized world — no longer a government by free opinion, no longer a government by conviction and the vote of the majority, but a government by the opinion and the duress of small groups of dominant men.

  23. Fabius Maximus replies: “Many of Madoff’s investors were wiped out, losing their entire savings. From wealthy to working stiffs — or unemployed formerly wealthy.”

    Any evidence for this?

    All cases I have read about so far talk about substantial losses, but no ruin, as the people concerned possessed considerable wealth overall. S.Spielberg has lost plenty of money, but is far from destitute. The assets of the Elie Wiesel foundation have been wiped out — not those of Elie Wiesel himself. Mrs. Betancourt has lost loads of money — and is still the richest person in Europe. Etc, etc.

    Concrete cases with names of wealthy investors having become effectively destitute after losing all their property to Madoff would be welcome. “Unnamed sources from a banking institute” propagating generic rumours about “investors potentially facing the loss of all their fortune” do not count.
    Fabius Maximus replies: The media is full of these stories, often mentioning that the “victims” had most or all of their money with Madoff. To cite just one: “A noted restaurateur’s recipe for disaster“, LA Times, 24 December 2008. There is also indirect evidence that many are wiped out. Like “Madoff Mess Means Business for Pawnshops and Lazard“, NY Times, 19 December 2008.

    For those of you just now tuning in, this thread began with my speculation about the political implications of the Madoff bust — not a plea for sympathy for these rich “victims”.

  24. FM, thanks for clarifying that quote – or I should say misquote on my part – from Wilson. Still:

    we have come to be one of the worst ruled, one of the most completely controlled and dominated, governments in the civilized world — no longer a government by free opinion, no longer a government by conviction and the vote of the majority, but a government by the opinion and the duress of small groups of dominant men.

    Although not referencing the Fed, still those comments seem highly applicable to that entity as part of the ‘small groups of dominant men’ dynamic. Also not a bad explanation for the TARP and the current shenanigans with the Treasury/Fed/bond markets.
    Fabius Maximus replies: I would rather see that you’ll be more careful in the future than a defense of your misquote. There is way too much misinformation out there; we need not propagate it through carelessness.

    Esp since the meaning of this passage is the opposite of your interpretation. Wilson was a advocate of big government, institutions like the Fed, to control the “dominant men” — aka the rich and political “bosses”. This is obvious to anyone who remembers their grade school American History textbooks, the chapters about Wilson and the progressive movement. Trust-busting, direct election of the Senate, etc.

  25. {FM note: I have added abstracts to 2 of the articles cited in this comment.}

    I’ve been thinking about this some more and have some articles that I’d like to pass along for consideration (you’ve probably read at least the first two, FM).

    Capitalism at Bay, The Economist, October 2008 – Perhaps a nice counterpoint to Stiglitz

    The Isle That Rattled the World“, WSJ, 27 Dec 2008 – “Tiny Iceland Created a Vast Bubble, Leaving Wreckage Everywhere When It Popped.”

    Banking Crises: An Equal Opportunity Menace“, Carmen Reinhart and Kenneth Rogoff, 17 December 2008 — Absract:

    The historical frequency of banking crises is quite similar in high- and middle-to-low income countries, with quantitative and qualitative parallels in both the run-ups and the aftermath. We establish these regularities using a unique dataset spanning from Denmark’s financial panic during the Napoleonic War to the ongoing global financial crisis sparked by subprime mortgage defaults in the United States.

    Banking crises dramatically weaken fiscal positions in both groups, with government revenues invariably contracting, and fiscal expenditures often expanding sharply. Three years after a financial crisis central government debt increases, on average, by about 86%. Thus the fiscal burden of banking crisis extends far beyond the commonly cited cost of the bailouts. Our new dataset includes housing price data for emerging markets; these allow us to show that the real estate price cycles around banking crises are similar in duration and amplitude to those in advanced economies, with the busts averaging 4 to 6 years. Corroborating earlier work, we find that systemic banking crises are typically preceded by asset price bubbles, large capital inflows and credit booms, in rich and poor countries alike.

    The interesting connection between the first two is the mention of capital inflows into the USA and Iceland prior to a banking collapse, and after period of financial liberalization. Reinhart and Rogoff provide a correlation between capital mobility and incidences of banking crises (Figure 4) in their paper. I’m not much of an economist, but it seems like an interesting connection.

    Also, as food for thought (slightly off topic, apologies): “Rules of Supply and Demand regulate recruitment to food in an ant society“, Deby Cassill, Behavioral Ecology and Sociobiology, June 2003 — Abstract:

    The process by which ant scouts move a group of nestmates toward a newly discovered food site is called recruitment. In this paper, I report on the interactions between scouts and nestmates that result in a graded recruitment response to graded food quality in the fire ant, Solenopsis invicta.

    … In summary, recruitment was an emergent property based on competent supply and demand decisions made face-to-face inside the nest rather than on the trail or at the food site.

    I offer that there is a similarity between ant pheromones/food recruitment behavior and human price systems, if only that they both allow coordinated reactions to diffused economic information. Personally, I think it helps to view the economy as an ecological process: an emergent phenomenon of a highly cooperative animal society. I hope these are of interest!
    Fabius Maximus replies: No apologies are needed on this site for links to relevant material — even when speculative like the Cassill paper!

    A note about The Economist: as many long-time readers have discovered, the secret motto of its staff is apparently “Always either interesting OR correct, but never both”. This rule allows easy interpretation of their articles.

    On the other hand, Reinhart and Rogoff are IMO major authorities. Their work is cited several times on the FM site, and always deserves close attention.

  26. We live in very interesting times. May I recommend a few websites that have been covering everything better than the mainstream media to date.

    The Automatic Earth superb overall coverage. My ‘must read’ every morning. If you just want to read one place for an excellent, up to date summary everyday, this is the place.
    Calculated Risk ( Home of great and now departed and greatly missed Tanta, but still an excellent site. For those interested in the details of the sub-prime carnage, it is very much worth reading Tanta’s old articles, boy did she know how things really worked in the industry.
    Mish Shedlock ( Always worth a read, old Mish really hits the nail on the head so many times.
    Naked Capitalism (
    Angry Bear ( Good blogsite with some excellent contributors.

    For theory I cannot recommend more highly Prof Steve Keen’s 2 sites. He is one of the very few economists who got it right … years ago (and of course was completely ignored). He is the author of a great economics book Debunking Economic (now available as an E-book at his site).

    One site is a blog (, the other ( a collection of economic history and theory. If you want to really understand the Minsky Financial Instability Theory or the history of economic thought for the last 500 years, this is the place to go.

    (Minsky,in particular was the great US economist who described the mechanisms of how this sort of crash could happen.)

    Where do we all go from here? Now that is the question. Everywhere in the world has now been affected to a greater or lesser degree and 2009 is going to be ugly, whole countries are going to go under. However what we can say with near 100% certainty is that any successful solutions:

    – Need to destroy debt, particularly consumer and corporate debt. And I mean destroy it, basically by cancelling (at least some of) it. Some countries are slowly moving towards this.
    – Keeps people in homes. This preserves the houses and gives people a roof over their head .. the alternative: tent cities and riots.
    – Needs to address chronic trade imbalances. The current model of globalisation is nonsense. Yep all those feral people protesting at each meeting of the WTO, G10 (G12, G20 …G5000, whatever) were right. All us mainstream people ‘tut tutting’ them were wrong. Note I said the ‘current model’, that does not mean free(ish) trade is wrong. Just the model where multi-national corporations avoid tax by moving production to ‘cheap countries’.

    An aside: the economics of globalisation never really made sense to me. Now the majority of (e.g.) Chinese exports to (say) the US are from multi-national corporations who have outsourced their production. When you add up all the costs of moving your production offshore, plus the extra shipping costs, costs of administration, etc, etc, for any but the most labour intensive products ….. it simply does not add up (even for a car these days, the labour cost is actually quite small). So either huge numbers of western companies are idiots (very possible of course) or there is another factor.

    A duh moment finally came after reading some (sadly forgotten) articles plus my own experience at a company 30 years ago. TAX. When you offshore you can, by transfer pricing, move the profits to a low or zero tax environment. Now I speculate that if the world had got its act together about tax havens a lot of ‘globalised’ production would never have happened. What would have happened would have been a lot more beneficial for everyone. Companies would have invested and built up production in other countries to meet their local demand, like the ‘old days’. Much more of a win-win situation for everyone.

    – Is more capital intensive. That means more spending goes into capital development, rather than consumption. Capital development means more spent on infrastructure (both human and physical), not just maintaining it, but growing it. Energy, research, transport, health, agriculture, environmental, etc. This is as much about changing attitudes as anything else. Spending for the future, rather spending for instant gratification. That old thing “leaving the world a better place after you”.

    – Has rising wages. A heresy under current ‘neo-liberal’ economics. But without rising wages:
    (1) The incentive for productivity drops. That means the incentive for investment in Innovation drops.
    (2) Corporate profits become too high, leading to far too much money to shareholders, CEO’s, etc.
    (3) Consumer spending cannot continue to grow unless debt grows .. and we can all see how well that works now!
    (4) Trade imbalances can continue. If the Japanese has responded to their crash in the 90’s by steadily raising their wages, then their huge trade surpluses would have disappeared … plus the average Japanese would have been rich by world standards and had a much better standard of living (even though it is pretty good now). Plus their 20 year recession would have disappeared. But wedded as they are to their ‘mercantilist’ model they cannot stop, even if the average Japanese pays a terrible price, piling up meaningless (and increasingly worthless) trade surpluses.

    Now the old refrain – too high wages and we will not be competitive (funny how that argument never applies to CEOs though). Really fix the tax shelters and we will see how true that argument really is.

  27. A debt based monetary system requires an ever ending input of new debt slaves and there’s a finite number of debt slaves. They have reached that limit and the pyramid scheme can’t proceed. It’s as simple as that.

    I would appreciate your thoughts on my blog dealing with this pyramid scheme:

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