The Cause of the 2008 Financial Crisis It is not yet clear whether we stand at the start of a long fiscal

crisis or one that will pass relatively quickly, like most other post-World War II recessions. The full extent will only become obvious in the years to come. But if we want to avoid future deep financial meltdowns of this or even greater magnitude, we must address the root causes. In my estimation two critical and related factors created the current crisis. First, profligate lending which allowed many people to buy overpriced properties that they could not, in reality, afford. Second, the existence of excessive land use regulation which helped drive prices up in many of the most impacted markets. Profligate lending all by itself would not likely have produced the financial crisis. It took a toxic connection with excessive land-use regulation. In some metropolitan markets, land use restrictions, such as urban growth boundaries, building moratoria and large areas made off-limits to development propelled house prices to unprecedented levels, leading to severely higher mortgage exposures. On the other hand, where land regulation was not so severe, in the traditionally regulated markets, such as in Texas, Georgia and much of the US Midwest and South there were only modest increases in relative house prices. If the increase in mortgage exposures around the country had been on the order of those sustained in traditionally regulated markets, the financial losses would have been far less. Here is a primer on the process: 1. The International Financial Crisis Started with Losses in the US Housing Market: There is general agreement that the US housing bubble was the proximate cause for the most severe financial crisis (in the US) since the Great Depression. This crisis has spread to other parts of the world, if for no other reason than the huge size of the American economy. 2. Root Cause #1 (Macro-Economic): Profligate Lending Led to Losses: Profligate lending, a macro-economic factor, occurred throughout all markets in the United States. The greater availability of mortgage funding predictably led to greater demand for housing, as people who could not have previously qualified for credit received loans (subprime borrowers) and others qualified for loans far larger than they could have secured in the past (prime borrowers). When over-stretched, subprime and prime borrowers were unable to make their mortgage payments, the delinquency and foreclosure rates could

not be absorbed by the lenders (and those which held or bought the "toxic" paper). This undermined the mortgage market, leading to the failures of firms like Bear Stearns and Lehman Brothers and the virtual failures of Fannie Mae and Freddie Mac. In this era of interconnected markets, this unprecedented reversal reverberated around the world. 3. Root Cause #2 (Micro-Economic): Excessive Land Use Regulation Exacerbated Losses: Profligate lending increased the demand for housing. This demand, however, produced far different results in different metropolitan areas, depending in large part upon the micro-economic factor of land use regulation. In some metropolitan markets, land use restrictions propelled prices and led to severely higher mortgage exposures. On the other hand, where land regulation was not so severe, in the traditionally regulated markets, there were only modest increases in relative house prices. If the increase in mortgage exposures around the country had been on the order of those sustained in traditionally regulated markets, the financial losses would have been far less. This two-Americas nature of the housing bubble was noted by Nobel Laureate Paul Krugman more than three years ago. Krugman noted that the US housing bubble was concentrated in areas with stronger land use regulation. Indeed, the housing bubble is by no means pervasive. Krugman and others have identified the single identifiable difference. The bubble the largest relative housing price increases occurred in metropolitan markets that have strong restrictions on land use (called smart growth, urban consolidation, or compact city policy). Metropolitan markets that have the more liberal and traditional land use regulation experienced little relative increase in housing prices. Unlike the more strongly regulated markets, the traditionally regulated markets permitted a normal supply response to the higher market demand created by the profligate lending. This disparate price performance is evidence of a well established principle of economics in operation that shortages and rationing lead to higher prices. Among the 50 metropolitan areas with more than 1,000,000 population, 25 have significant land use restrictions and 25 are more liberally regulated. The markets with liberal land use regulation were generally able to absorb from the excess of profligate lending at historic price norms (Median Multiple, or median house price divided

by median household income, of 3.0 or less), while those with restrictive land use regulation were not. Moreover, the demand was greater in the more liberal markets, not the restrictive markets. Since 2000, population growth has been at least four times as high in the traditional metropolitan markets as in the more regulated markets. The ultimate examples are liberally regulated Atlanta, Dallas-Fort Worth and Houston, the fastest growing metropolitan areas in the developed world with more than 5,000,000 population, where prices have remained within historic norms. Indeed, the more restrictive markets have seen a huge outflow of residents to the markets with traditional land use regulation (see: http://www.demographia.com/db-haffmigra.pdf). 4. Toxic Mortgages are Concentrated Where there is Excessive Land Use Regulation: The overwhelming share of the excess increase in US house prices and mortgage exposures relative to incomes has occurred in the restrictive land use markets. Our analysis of Federal Reserve and US Bureau of the Census data shows that these over-regulated markets accounted for upwards of 80% of overhang of an estimated $5.3 billion in overinflated mortgages. 5. Without Smart Growth, World Financial Losses Would Have Been Far Less: If supply markets had not been constrained by excessive land use regulation, the financial crisis would have been far less severe. Instead of a more than $5 Trillion housing bubble, a more likely scenario would have been at most a $0.5 Trillion housing bubble. Mortgage losses would have been at least that much less, something now defunct investors and the market probably could have handled. While the current financial crisis would not have occurred without the profligate lending that became pervasive in the United States, land use rationing policies of smart growth clearly intensified the problem and turned what may have been a relatively minor downturn into a global financial meltdown. Never Again: All of the analyst talk about whether we are slipping into a recession misses the point. For those whose retirement accounts have been wiped out, or stock in financial companies has been made worthless, those who have lost their jobs and homes, this might as well be another Great Depression. These people

now have little prospect of restoring their former standard of living. Then there is the much larger number of people whose lives are more indirectly impacted the many households and people toward the lower end of the economic ladder who have far less hope of achieving upward mobility. All of this leads to the bottom line. It is crucial that smart growths toxic land rationing policies be dismantled as quickly as possible. Otherwise, there could be further smart growth economic crises ahead, or, perhaps even worse, a further freezing of economic opportunity for future generations. Wendell Cox is a Visiting Professor, Conservatoire National des Arts et Metiers, Paris and the author of War on the Dream: How Anti-Sprawl Policy Threatens the Quality of Life

By James F. Davis | October 14, 2008

As someone who spent the majority of his life as an international bank analyst and executive, I learned, that to fix a problem, one needs to understand what caused it. It can be difficult to see because sometimes it takes time for the effects of bad decisions to manifest themselves. It also requires that we examine the facts rather than our emotional biases. The facts are that approximately 6% of all mortgage loans in United States are in default. Historically, defaults were less than one-third of that, i.e., from 0.25% to 2%. A huge portion of the increased mortgage loan defaults are what are referred to as sub-prime loans. Most of the sub-prime loans have been made to borrowers with poor credit ratings, no down payment on the home financed, and/or no verification of income or assets (Alt-As). Close to 25% of sub-prime and Alt-As loans are in default. These loans increased dramatically as a 9/30/99 New York Times article explained, In a move that could help increase homeownership rates among

minorities and low income consumers, the Fannie Mae Corp. is easing the credit requirements on loans that it will purchase from banks and other lenders. Why would banks make such risky loans? The answer is that the Clinton administration pressured the banks to help poor people become homeowners, a noble liberal idea. Also the Clinton Justice Department threatened banks with lawsuits and fines ($10,000 per application) for redlining (discrimination) if they did not make these loans. Also ACORN (Obamas community service organization) was instrumental in providing borrowers and pressuring the banks to make these loans. To allow Fannie Mae to make more loans, President Clinton also reduced Fannie Maes reserve requirement to 2.5%. That means it could purchase and/or guarantee $97.50 in mortgages for every $2.50 it had in equity to cover possible bad debts. If more than 2.5% of the loans go bad, the taxpayers (us) have to pay for them. That is what this bailout is all about. It is not the government paying the banks for the bad loans, it is us!! Principally Senate Democrats demanded that Fannie Mae & Freddie Mac (FM&FM) buy more of these risky loans to help the poor. Since the mortgages purchased and guaranteed by FM&FM are backed by the U.S. government, the loans were re-sold primarily to investment banks which in turn bundled most of them, taking a hefty fee, and sold the mortgages to investors all over the world as virtually risk free. As long as the Federal Reserve (another government created agency) kept interest rates artificially low, monthly mortgage payments were low and housing prices went up. Many home owners got home equity loans to pay their first mortgages and credit card debt. Unfortunately home prices peaked in the winter of 2005-06 and the house of cards started to crumble. People could no longer increase their mortgage debt to pay previous debts. Now, we taxpayers are being told we have to bail out the banks and everyone in the world who bought these highly risky loans. The politicians in Congress (mostly Democrats) do not want you to know they caused the mess. During the past eight years, the Bush administration made 17 attempts to reform FM&FM, having been made aware by whistleblowers that the books had been cooked by Clinton appointees, James Johnson and Franklin Raines (most recently Barack Obama financial advisors) who gave large bonuses to themselves and other Clinton appointees by falsely showing huge profits.

In 2005, John McCain submitted a Fannie Mae reform bill. Democrats blocked it in Committee from getting to the Senate floor for a vote. By 2006 there was enough evidence of malfeasance that Raines was forced out. He had paid himself over $90 million. Recently the court ordered him to pay back $40 million in fines, bonuses and stock options that he gave himself based on false financial statements of Fannie Mae profits. In the 2006 elections, the Democrats took control of the House and Senate. There are plenty of videos on the Internet showing many Democrats including Senate Banking Committee Chairman Democrat Christopher Dodd and House Banking Committee Chairman Barney Frank, responsible with overseeing FM&FM, assuring us that there were no problems with FM&FM right up to their collapse. Not surprisingly, virtually all the investment banks that are in trouble and being bailed out are run by financial supporters of Obama and other Democrats. Secretary of the Treasury Paulsen was head of Goldman Sachs. The new head of the $700 million bailout is also from Goldman Sachs. This is like letting the fox be in charge of hen house security. It was announced that our government will infuse capital into the troubled banks. This gives whoever is in power of our government the ability to force the same kind of abuses that have caused this massive banking crisis in the first place. Barack Obama has received more campaign donations that any other politician in the past three years from Fannie Mae and Wall Street. FM&FC have been virtually private piggy banks of campaign contributions for Democrats for the past 10 years. Yes, a token amount went to some Republicans. And there is plenty of blame to go around in this financial crisis, but the reason it happened was 100% caused by a Democrat run government that forced a liberal policy initiated by President Clinton and reforms primarily blocked by Democrats. One would never know this by watching the news or reading newspapers. Until the majority of our citizens understand whom (government liberals) and what (liberalism/socialism) caused this mess, we will allow our elected officials, through massive inflation, to lower the standard of living of those of us who are financially prudent and give our earnings to those who are not prudent. The big excuse for the bailout is that credit markets have frozen up. But it is not true. There is plenty of credit available for good credit risks.

The only way this can be rectified is to allow the people who made the mistakes to take their losses. It is called taking personal responsibility for ones actions. Already we see that the bailout has had virtually no effect on the markets other than to cause huge sell offs because smart investors see that the U.S. is adopting failed liberal socialist policies. Our government is following in the footsteps of Hoover and Roosevelt. We do not need to have another depression, but the government is taking the steps to make it happen. The taxpayer financed bailout should be reversed immediately as it will only encourage more irresponsible fraudulent behavior.

Mr. Davis can be contacted at jfd11@cornell.edu

James F. Davis is a Director of Accuracy in Media. He was an international banker for 20 years. Positions held include head of the International, Latin America and Real Estate Divisions.

Guest columns do not necessarily reflect the views of Accuracy in Media or its staff.

69 comments David Goodis October 14 at 9:22 pm | #1 | Link Why is it important to know that James F. Davis is married to a Chilean? As head of the Latin America Division (of what, exactly?) Davis must be aware that the causes of this crisis reach back far more deeply than just into the Clinton

administration; he must remember that the neoliberal deregulatory schemes that helped foster this chaos had their first real-time trials down there in the Southern Cone. Or was he just too busy on his honeymoon? Another glass of sparkling Pinochet, honey? Tommy Troll October 15 at 3:26 am | #2 | Link liberal policy initiated by President Clinton and reforms primarily blocked by Democrats. Excuse me, I think your time machine is broken. Who controlled congress during the Clinton administration and most of Dubyas? Or, I think, like in the film The Fly, something stupid and misguided climbed into your time machine and combined its DNA with you (or is it that you have corrupted the intelligence of a cockroach? If so, my apologies to the roach). James F. Davis October 15 at 10:52 am | #3 | Link To address the sarcastic comments of Mr. Goodis: Unfortunately, the comments at the end of the article about my being head of Latin America and having a Chilean wife were taken from an article I had written previously about Chile. For the record I was head of First Interstate Banks Latin American Division in NY which was merged into Wells Fargo and I was later head of the International Division of Manufacturers and Traders Bank. As to his clear lack of knowledge of what happened in Chile, first I must mention that my Chilean wifes father was a personal adviser to Marxist president Allende and her uncle, Luis Corvalan, was a Senator and head of the Communist Party of Chile for about 50 years, so I have a bit more primary knowledge of Chile. Second, the country was destitute after three years of Marxist rule and government regulation. During the following 16 years of deregulation and privatization by President Pinochet, Chile had the highest real economic growth rate of any country in the world according to World Bank and UN studies. Concerning Mr. Trolls comments, who also did not address the substance of my remarks, I only will say: (1)In the Attorney Generals office, Bush has removed

only 8 of the 250+ attorneys appointed by Clinton. (2) Check to see which party controlled the Senate from 1992 until 2008. He will discover that in only a couple of those years did the Republicans have a slim majority and that having equal numbers of each party on many committees meant that the Democrats could and did block all reform measures. David Goodis October 15 at 11:39 am | #4 | Link But, James F Davis, while the country did experience growth, it also suffered massive inflation (at one point citizens expected to pay 74% of their income on things like bread, where under Allende it had been only 17%), record unemployment, and experienced (surprise, surprise) a publically-funded bailout when the system eventually crashed. The only thing that saved the country, it has been argued, was the state-owned copper mine Codelco, which provided roughly 85% of the countrys export revenues. This is what deregulation, privatization and cuts in social spending (the free market wizardry that conservatives in America are in love with) did to that economy. Of course it fosters rapid growthits supposed to. The outcomes of that growth vertiginous and often fictionalin several Latin American countries, were ultimately disastrous. And we might also remember the torture and disappearance of many opponents of these free market ideas. Dr Duncan Druhl October 15 at 12:30 pm | #5 | Link I may be way off base, here but arent we forgetting a couple of small details in the cause derogation? First is that many or most global banks decided to deleverage their Balance Sheets at once early this summer. This does the same thing to security values as it would to the value of use cars in a market where everyone decided to trade in their clunker on a new one at the same time. Used cars would be a glut on the market and priced accordingly in line with what you may have learned in Econ 101, as happened to the highly leveraged securities market; thus dropping the bottom out of the balance sheet of any bank that was caught with its securities in house. My own hypothesis is that the banks dumping these securities simultaneously covered their positions with put options, thus

moving the money from the Balance Sheet to the Income Statement while catching unsuspecting institutions out. Note here that marking to the market is what drove the Balance Sheets down, not necessarily the inherent value in the securities; as the banks caught out in the South American Loan debacle in the 70s were allowed to write off the useless loans over a 5 or 10 year period so as to ameliorate the impact on their balance Sheets that option was removed with the mark to market rule. Secondly, those securities were purchased and priced in line with an expected 2025% default rate even a 50% default rate would have still conveyed a 13% profit on those devalued instruments, so where is the panic? I can find absolutely no rationale for the sudden deleveraging that brought about the much publicised panic since these issues had been trning over fairly predictably for some time. Indeed, while many banks were over leveraged up to 40%+ in between quarterly inspections, perhaps it was the quarterly adjustments for inspectors that brought about a sudden decision to shift everything, in turn driving the prices even lower than expected. However, the underlying securities are probably still fundamentally as sound as the housing market which, while soft, is not in a complete melt-down unless your income is currently dependent on selling houses, that is. There are a lot of questions in this matter that are not being answered or investigated, but appear to be glossed over in hopes that people wont realise that theyve been had, though perhaps manipulated is a more accurate term. Dr Duncan Druhl October 15 at 12:36 pm | #6 | Link Sorry, I blew the correction on my first sentence, it should read: I may be way off base, here but arent we forgetting a couple of small details in the application of cause to this crisis. sorry. Ancient Birdman October 15 at 2:19 pm | #7 | Link Its a damned shame our esteemed left leaning fellow travelers cannot seem to ingest even a smattering of truth without spouting the well used vocabulary taught by the Lenin crowd so many years ago. That is why I have suggested that the

Democratic Party be changed to the Socialistic/ Democratic Party, as so many are card bearing members of one or more Socialist groups,and Dan Webster would no doubt concur by their actions. TK October 15 at 2:24 pm | #8 | Link This article is a bunch of one-sided, partisan crap! The problem is a faulty (and corrupt) domestic economic policy resulting in, among other things, a legislated lack of proper regulation and oversight of the financial services industry and its a problem thats been developing over the last 25 years. It began in the Reagan administration and has run unabated until now. Dr Duncan Druhl October 15 at 3:01 pm | #9 | Link TK please, if you are seeking attribution, put it back to Nixon who took us completely off Gold accountability world-wide thus loosening the printing presses for the Fed to go as wild as it has, leading to the bubbles we have been experiencing. Im afraid you are confusing regulatory issues over business with the regulation over the issuance of currency that Congress should have maintained but abdicated in 1913. Had Wilson not created the sub-contracting Federal Reserve private bank, there is some doubt that 1929 would have been anything more than another ordinary year, though the 20s leading up to that would have been comparably unremarkable, as well. Ancient Birdman October 15 at 4:24 pm | #10 | Link Dr. Duncan= TK is so transfixed on his big Govt policy (Socialistic) viewpoint, that your well parsed explanations are totally lost in translation. Notice the reference to Reagan.This is obviously a try to politicize your historic and learned reseach on Economic policy. Facts remain facts, no matter how much manure gets spread over them.

TK October 15 at 6:04 pm | #11 | Link To Ancient Birdman, Post 10; It certainly seems to me that the socialistic nationalization of our heretofore free market financial services sector was, in fact, led by the Republican Bush II administration, supported by any number of so-called conservatives, neoconservatives and assorted other Republicans, including the current GOP presidential candidate and his supposedly very conservative running mate! And, in case you hadnt noticed, the Bush II administration has expanded the size of government (and its annual deficits and its additions to the national debt) by a greater factor than any other president in history, including even the partisan GOPs favorite ogre, FDR! On the last matter, I will defer to your personal expertise and experience with manure. TK October 15 at 6:20 pm | #12 | Link To Dr. Duncan Druhl, Post 9; I agree with your comment on Nixon and gold, as well as your comments on Congress and the Federal Reserve. And it may well be that these issues are the actual foundation of the current problem. But I do believe that the possibly inexorable progress towards the current problem was singularly exacerbated by deregulation of and lack of proper oversight over certain kinds of financial services businesses and their practices. To me, at least domestically, poorly regulated securitization and questionable profitization are catalyst causes of the problem at hand. Dr Duncan Druhl October 15 at 6:56 pm | #13 | Link

TK, Prior to Carter legalising (because it was outside the common code of practise beforehand, as you might expect) and requiring banks to make mortgage loans that were expected to default, the bases for this summers debacle were pretty much non-existent. The Clinton administration sped up the process by first allowing, then expediting the bundling of sub-prime loans and their purchase by Fannie and Freddie. Before 1993, they wouldnt touch them. Aside from fulfilling a probable campaign promise to interests that Im sure generously contributed to his campaign, this action also released considerable funds for the banks to allocate to safer or, again, risky loans. Then, when the Fed loosed the printing presses in the early years of this decade, there was so much money floating around and increased pressure to make risky loans (spurred on by the likes of ACORN), that the development of the mortgage backed securities was either a planned event or a creative insight take your pick. Those are the key elements in creating this problem, not GWB. It was, in fact, his Chief Economic Adviser who cautioned Congress early in the first administration that Fannie and Freddie were in danger of being seriously overexposed to high-risk loan portfolios. Ill repeat something I noted earlier, at 12:30 local time, the actual cause of the crisis was an overloading of the market by banks deleveraging their Balance Sheets either to create the crisis or in overly anticipating the quarterly review of their leverage position. Within those 90 day windows, banks were often carrying hugely leveraged positions and it isnt as though they suddenly decided that these were bad investments no, my hypothesis is that a few or many decided to force the situation, for whatever reason, and probably covered themselves with put options to move the money to the income statement side. From the buy-ups since the crisis, somebody surely has a lot of money to spend, eh? Remember, too, with international banks, money moves wherever they want it to be, so results in some countries are not the same as those reported in others. This is a banking operation, TK, not a failure of regulation since US or even western world regulations could not have effectively stopped it. Indeed, though, if you regulate that market, then what about the futures markets in grains, oil, bonds, pork bellies? Dabble in those and youll find the farmers up in arms; or, actually, agricultural conglomerates who donate untold dollars to election campaigns. My suspicion is that regulations will not actually be forthcoming except those that spin well on the media, but do nothing. So, why did it happen? If you follow my thinking, there is a hint that there was no real underlying financial reason (see above, 12:30) because the banks had been carrying those highly risky assets for years in some cases and the default rate was within the original price parameters; but there does happen to be an election this year in the US.

And when you have eliminated the impossible, whatever remains, however improbable, must be the truth. is probably my favourite Sherlock Holmes quote and it fits here, I think. Michael L OBrien October 16 at 2:44 am | #14 | Link The Power Brokers Have Corrupted Washington and are Destroying Capitalism. My father recently sent me an article that you have written ?The Cause of the 2008 Financial Crisis?. This story is similar to a theory that I have had for quite some time. It is the reason that I started our Family Investment Company. Banks, Insurance Companies and Mutual Funds control most major corporations in the United States. They do this with the American Taxpayers Deposits, Premiums and Investments in Mutual Funds and 401k?s. With our money they control more than 50% of most major corporations voting rights, elect the Board of Directors who in turn decide who runs the corporations. Although I am unaware of who receives the political donations I know it is happening. If you have any way for me to find more about this information I would be grateful. I would like your input on a solution for this problem as I will outline mine simply and briefly below. ? Voting Rights for Bank, Insurance Companies and Mutual Fund Management Companies. o All banks are to become mutual in ownership and not publically traded. Each account holder shall have one vote. o All insurance companies are to become mutual in ownership and not publically traded. Each account holder shall have one vote. o All mutual fund shareholders should be able to elect their management company; shareholders shall have one vote per account. ? Ownership of Publically Traded Corporations by Banks, Insurance Companies and Mutual Fund Management Companies. o All banks should be prohibited from owning stock in any publically traded corporation.

o All insurance companies should be prohibited from owning voting stock in any publically traded corporation. o All mutual fund management companies should be prohibited from voting for publically traded companies. ? Political Donations and Fundraising by Banks, Insurance Companies and Mutual Fund Management Companies. o All banks, insurance companies and mutual fund management companies should be prohibited from political donations and fundraising. Thomas Jefferson once said: I believe that banking institutions are more dangerous to our liberties than standing armies . . . If the American people ever allow private banks (Example: The Federal Reserve Bank) to control the issue of their currency, first by inflation, then by deflation (Example of the Recent Real Estate Market), the banks and corporations that will grow up around [the banks] . . . will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered . . . The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.Thomas JeffersonThe Debate Over The Re-charter Of The Bank Bill, (1809) Abraham Lincoln once said: ?I see in the near future a crisis approaching that unnerves me and causes me to tremble for the safety of my country. . . . corporations have been enthroned and an era of corruption in high places will follow, and the money power of the country will endeavor to prolong its reign by working upon the prejudices of the people until all wealth is aggregated in a few hands and the Republic is destroyed.? ? U.S. President Abraham Lincoln, Nov. 21, 1864 (letter to Col. William F. Elkins) It doesn?t take a genius to see what?s going on beneath the veil, just as Abe could see back in the day. People everywhere from Main Street to Wall Street can tell you this and are waking up to the fact that corporations, though originally chartered to serve the public interest, need to bring their practices back in line with modern values. The true driving force of our economy. ? Small business (500 or fewer employees) account for 97% of all businesses in the United States. SBA Small Business Administration ? Small business generate approximately 70% of all new jobs. SBA Small Business Administration ? Small Business employ approximately 50% of the work force. SBA Small Business Administration

? Small Business Created 20,000 net new jobs in August 2008 ADP Small Business Payroll Report. ? Small Business Created 28,000 net new jobs in September 2008 ADP Small Business Payroll Report. ? ?Two Thirds of the top tax bracket are small business owners.? Steve Forbes Thank You Michael L. O?Brien An American Taxpayer All that is necessary for evil to triumph is for good men to do nothing. Edmund Burke Ancient Birdman October 16 at 7:32 am | #15 | Link To TK Post #11 TK, what are you for ? James F. Davis October 16 at 1:28 pm | #16 | Link Mr. Goodis education of Chile suggests he has been given a lot of misinformation. Inflation was running about 1,000% and copper was providing more than 80% of all foreign currency earnings when Allende blew his brains out and the military (Pinochet) took over in late 1973. Copper prices dropped after Pinochet took over and most of the worlds banks refused to lend to Chile. Nonetheless, by instituting free market reforms, inflation was brought down to 1/100th of what it was, copper revenue dependence dropped to below 50% and the nation prospered. All one needs to be is intellectually honest and check the statistics out. TK October 16 at 5:21 pm | #17 | Link To Dr. Duncan Druhl, Post 13

Just today, Henry Paulson personally stated that the current crisis is the result of Wall Street failures as well as failures of a variety of regulatory authorties. My original point was simply that these particular failures that Paulson alludes to actually began in earnest some 20+ years ago and were accentuated and amplified since that time, most egregiously over the last four to five years. And, from what Ive seen, those blaming what amounts to domestic economic policy failures on giving mortgages to people who couldnt pay them back, on community agencies like ACORN, or even policies of Fannie, Freddie, etc., are not on the mark: Ive heard that the normal historical default rate on residential mortgages as a whole is normally 2.50% to 2.75% and that the current average rate of default is about 6.00%. Granted, the current rate of default is more than double the normal rate of default, but its still only 6%! With 94% of mortgagors fulfilling their obligations, it sure doesnt seem that 6% of defaults (regardless of the demographics of or the causes of the defaults) could possibly cause the current multi-trillion-dollar problem (???) I believe theres a whole lot more to the problem than the political partisans are yapping about, the GOPs blaming Carter and Clinton and the DEMs blaming Reagan and Bush. (Although, it does seem clear that the deregulation of the S & Ls under Reagan did lead to the $200+ billion S & L bailout in the early 90s and this seems similar to that in many respects.) Personally, I think its the blowing of smoke or plain naivete to blame the entire current economic situation on urban-area sub-prime and alt-A residential mortgages. And, likewise, the proximate cause or catalyst is very probably NOT specific policies of FDR 75 years ago or the policies of Nixon 35 years ago (???) (I happen to live in the suburbs and the most numerous foreclosures in my county are occurring in some pretty exclusive and pretty expensive suburban gated communities where the homes sold from $650k up, rather than within, shall we say, the more affordable neighborhoods of my local citys core. I do believe thats pretty much the case nationwide with regard to residential mortgage foreclosures.) David Goodis October 16 at 7:41 pm | #18 | Link

Mr. Davis, read through Naomi Kleins The Shock Doctrine. It contains exactly the account I was referencing. No one so far has argued with her details, and I havent found any other sources that dispute it. If youre in possession of better information, please write directly to her. James F. Davis October 16 at 8:20 pm | #19 | Link David, I started reading Naomi KleinsThe Shock Doctrine some time ago, but it was so full of nonsense that I did not finish it. It is a great disservice to you that you have read and believed her and did not check statistical databases like the World Bank and UN. I was the first banker to lend to the private sector after Pinochet took over in the 70s and had first hand access to the financials of the country. Unemployment was over 30% when Pinochet took over, inflation was over 1,000%. It is true that in 1975 the Chilean economy had a 25% contraction as government enterprises were being sold back to the private sector and many government bureaucrats lost their jobs in the transition. But after that the country was the fastest growing economy in the world (with about 13% inflation, a historical low at the time) until Pinochet stepped down and the socialist took over again. You would be surprised to learn that Pinochet was most supported by the poor in Chile because he did more to raise their standard of living than the socialist ever did. Michael L OBrien October 16 at 8:29 pm | #20 | Link We are only at fault if we do nothing to fix the problem. Financial Institutions control more than 50% of major US corporations who are supposed to serve the public interest. Financial Institutions Donate major amounts of money to Presidential Campaigns. Los Angeles Times March 21, 2008 2000 Bush $4 million, Gore $1.4 Million 2004 Bush $8.8 million, Kerry $4.4 Million 2008 H. Clinton $6.29 Million, Obama $6.03 Million, McCain $6.03 Million

These are our Deposits, Premiums and Investments. What do we the American Tax Payer get for this? We get to bail them out @ $3,500 per tax payer. We get a government that works for the institutions. We get institutions that control the government. Small business is the driving force in America with more than 50% of the total jobs and 70% of new jobs created. Now Obama wants to tax small business owners which in turn will only hurt the American Worker. An expiration of the Bush tax cuts will double taxes for a worker making $42,000 a year. Now I guess that is not raising taxes, it is doing nothing. None the less it is a tax increase! Michael L OBrien American Tax Payer All that is necessary for evil to triumph is for good men to do nothing. Edmund Burke James F. Davis October 16 at 8:33 pm | #21 | Link To DK and Dr. Duncan. TO keep the article short, I zeroed in on the main reasons we had this crisis. But I agree with Dr. Duncans points that the creation of the FED started inflation and that going off the gold standard made it worse and allowed our politicians to be more irresponsible. Reagans deregulation of the S&L;industry saved it. Our government had previously fixed the interest rates banks could charge for mortgages. Due to the Carter inflationary policies, the cost of banks borrowing money was more than twice what they were allowed to lend at, so the banks started doing high risk, high return business to stay afloat. Deregulation of interest rates on mortgages saved the industry, but the mess had to be cleaned up first. Michael L OBrien October 16 at 8:40 pm | #22 | Link

I must make a correction to McCains Donations received from financial institutions $2.59 Million. Michael L. OBrien American Tax Payer The figures were in an article in the Los Angeles Times back in March and from figures compiled by The Center for Responsive Politics. David Goodis October 16 at 9:46 pm | #23 | Link Mr. DavisIve read a lot of criticism of the book (some of which Naomi Klein has addressed at her website), but none of it has dealt with her assertions about the specifics of Chiles economy. Her claims in the book are obviously wide-ranging, and, because they are, Ive tried to find accounts that balance hers. The sections on Chile are extensively annotated, so I had no reason to believe that the numbers were fudged. You are honestly the first source Ive ever come across to say that they are, and in fairness I tried consulting the databases you suggested. However, they dont go back far enough. Im interested, now, in your take on Orlando Letelier, since he plays such a pivotal role in the Chilean narrative (his reading of the inner harmony between free market practices and political terror seems in many ways foundational for Kleins whole text). Hes a subject one can more easily research, but I was wondering if you also had a first-hand version of his story. What started as an aggravated pot-shot is now getting interesting. Thanks for answering my posts. (I also have to say Im sorry for the intial sarcasmIve found, unfortunately, that some internet writers only drop the mask when theyre under attack.) mubashar October 17 at 9:09 am | #24 | Link take this the situation due to the amarican influnce on differnt countries. amarica in trouble due to the unfare war against muslims.

David Goodis October 17 at 10:42 am | #25 | Link Despite any arguments about the rate of inflation, there have been many reassessments of the effects of neoliberal policies on Latin America, and many of them argue that those policies mainly helped concentrate the highest amounts of wealth in only the smallest band of the population. That seems to have happened in this country as well. Stripped of its errors or drama, Kleins argument about the class effects of the free market economy seem quite accurate. The readings Ive done in free market economics are very ambiguous when it comes to assessing the human impact of these practices. By looking at one area of assessment, there is often a general shearing away of negative consequences. Will Wilkinsons happiness studies, in all their wide-ranging considerations, never take the economic practices that foster happiness as anything other than neutral; if Americans overall happiness is coextensive with disatrous cultural or environmental consequences, that relationship is never mentioned. Tyler Cowen, in a conversation with reason.com, talks about cultural loss as a reality which, as an economist, he is willing to accept. There seem to me to be underlying anthropological, human and ethical mistakes here. Seen this way, Kleins book and others merely seek to correct them. Michael L OBrien October 17 at 10:43 am | #26 | Link I would agree that while we were coming out of recession we were struck on September 11th. My Father did not make it into work that day because he had to vote. He has not worked since. My baseball coach from when I was a little kid died and a friend that I grew up with also died on that day, both were New York City Fireman. I dont feel that economically we have recovered from that yet. I do know that we have not been struck on our soil since. I also know that in this country and the way I was raised; many religions and races live under One God in Peace. Our Great Country is not just great because of the Freedoms and Structure of our Government that our forefathers laid out, but also the diversity of many people and countries rolled into one. Our form of

Government known as a Republic (Not a Democracy as some like to think) keeps the power out of the hands of a few and spreads it throughout our land. There are fifty states, over 80,000 different tax jurisdictions and to be elected President you must obtain 270 electoral votes. This is the way our country spreads the power and doesnt allow majority to rule. Although I do have my concerns that too much power is in the hands of the financial institutions which conflicts with our national representatives I am confident that we will fix the problem as a nation. If you look around the world there are many nations with fewer Religions, Races and Cultures that cannot say that they have made it work. My friend, we are not at war against Muslims or the Muslim Religion. Religion should never be used to divide. That is why the United States Works. Thank You Michael L. OBrien American Tax Payer