A Crisis of Unintended Consequences

Our current economic crisis is being called ‘a perfect storm’ by some columnists and experts. That’s probably accurate. A crisis this deep and this pervasive cannot be created by just one or two errors in judgment, but requires a series of short-sighted decisions that each brought their own unintended consequences.

The Federal Reserve Board started cutting the prime rate in January, 2001 from its high of 9.5% in order to combat an emerging recession. This trend was accelerated by the September 11 attacks as a new world of risk was priced into the markets. In mid-2003, the prime rate found its bottom at 4%, but by this time the housing bubble was growing rapidly. It was easy to borrow money, especially if you wanted to purchase a house. In addition, it was obvious that there was money to be made in ‘flipping’ houses as investments rather than living in houses as residences.

Meanwhile, U.S. and global investors with lots of cash from the ‘good times’ of the 90s and early ’00s were looking at our feeding frenzy in the housing market as a safe place to make high profits. In a political climate of deregulation and free-market enthusiasm, Wall Street firms clamored to connect these rich investors with our rapidly expanding housing market by creating some very complicated financial instruments. These instruments…such as mortgage-backed securities…gave easy access to the housing market as a ‘wealth engine,’ but this new cash also fed the rapidly increasing price spiral. The housing bubble made a few people very rich before it made many people very poor, devastating the global economy in the process.

The problem I have with seeing our 2008 collapse as ‘a perfect storm’ is that this concept makes it appear that it was just bad luck. Some might think that it might be just a one-in-a-million chance that these seemingly disconnected and innocent forces might flow together sometime in the future to create another economic meltdown. No…this wasn’t bad luck. A series of decisions were made by na├»ve and overly-trusting people where caution was tossed to the wind for short-term profit. We need to know the details of what happened and who made the key decisions that unleashed this highly risky behavior and made it part of our self-destructive culture.

“Never Again: What Economic Safeguards Are Needed in the 21st Century?” can be framed as a national conversation of truth and reconciliation. While each citizen in our country didn’t get to directly participate in the creation of this crisis, each of us watched it unfold and accelerate with dizzying speed…and many of us recognized it as a house-of-cards, but were too busy doing other things to sound the alarm. It happened ‘on our watch’ so we’re responsible to evaluate the events and our failings to make sure our learning curve protects future generations.

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