Cause of Economic Crisis

Anatomy of a Train Wreck: Causes of the Mortgage Meltdown is a research report written by a University of Texas at Dallas economics professor about the cause of the current economic crisis. If you’ve read Pharaoh’s Dream – A Modern Interpretation by J. Reuben Clark, Jr., then you’ll be especially interested in this excerpt from the executive summary of the report:

Why did the mortgage market melt down so badly? Why were there so many defaults when the economy was not particularly weak? Why were the securities based upon these mortgages not considered anywhere as risky as they actually turned out to be? This report concludes that, in an attempt to increase home ownership, particularly by minorities and the less affluent, virtually every branch of the government undertook an attack on underwriting standards starting in the early 1990s. Regulators, academic specialists, GSEs, and housing activists universally praised the decline in mortgage-underwriting standards as an “innovation” in mortgage lending. This weakening of underwriting standards succeeded in increasing home ownership and also the price of housing, helping to lead to a housing price bubble. The price bubble, along with relaxed lending standards, allowed speculators to purchase homes without putting their own money at risk.¹

As Robert Higgs noted in Participatory Fascism:

In all cases a coalition of big business and the government has emerged, as “fascism’s abrogation of the market in favor of political control over the economy inherently favors big business at the expense of the small entrepreneur.” Characteristically there has been an “extensive interchange of positions between ranking civil servants and high corporate executives”.

If you have time, you might enjoy this video that explores the cause of the crisis from the PBS show McCuistion.

Sources:

1. Leibowitz, Stan J. “Anatomy of a Train Wreck: Causes of the Mortgage Meltdown”. 3 October 2008. The Independent Institute. 21 June 2009.↩