With the clarity of time we can look back at the brink of the collapse that hit us just prior to the last national election.  In the midst of the collapse we were stunned and angry, and tended to blame the party in power. Although the Democrats had controlled both houses of Congress since 2006, the disaster took its bigger toll on the Republicans.

While the roots of this collapse extend back through many administrations of both parties, it is important to know what did not cause this as well.

Some blamed the deficits, others blamed deregulation, but many just saw the main cause as unbridled greed.  I contend that while there were deficits, and there was greed, none of these played a critical role in fomenting this crisis.

As Thomas Sowell noted, blaming this crisis on greed is like blaming an airplane crash on gravity.  It is true but it doesn’t really explain anything. Worse if we just blame the undeniable then there is no need to examine human error, design flaws, or study ways to keep it from happening again.

Greed has been with us since the dawn of man. Why did it decide to show its ugly face in September of 2008? Greed is encumbered by the limits of a rational society and in a capitalist system it is encumbered by competition.  I may want to charge $2,000 a ton for steel, but competition keeps me from charging what I want, and even forces me to keep my payroll and expenses in line.

Our government tries to contain the fear of greed with regulations. If we are to blame greed we must face the failure of our regulations, or we may even need to face the possibility that our regulations fostered greedy behavior.  The second most common blame was the laissez faire attitude that had fostered deregulation of the financial markets.   Usually this is directed at the repeal of the Glass Steagal Act which separated lenders from investment banks. This law was repealed under The Gramm-Leach-Bliley Act, also known as the Financial Services Modernization Act of 1999, which was signed by President Clinton.

But other nations, notably Canada, also repealed similar legislation and they did not experience the financial crisis we did. But Canada also did not suspend prudent lending standards to force the spread of home ownership beyond its natural market.

Nor was deregulation the norm under George W Bush. In fact just the opposite was true.

Elliot Spitzer noted that we did not suffer from the lack of regulators or regulations. There were plenty to do the job, but they seem to lack the courage and the will to do the job.  We needed better regulations, not more of them.  In many cases the regulated industries such as Fannie Mae  (exempt from SEC and FDIC regulation) spent enormously on lobbyists and campaign contributions to thwart efforts to regulate them.  It was successful for them.

The biggest recipient of campaign contributions from AIG was Barak Obama. The biggest recipient of the PAC assembled by the largest mortgage lender for Fannie Mae, Country Wide Finance,  was Barak Obama. The largest recipient of campaign funds from Fannie Mae was ….. yes, Barak Obama. The second largest recipient in these three cases was Chris Dodd, Chairman of the Senate Banking Committee.

The deficits which seemed so irresponsible at the time now look like pocket change.  Deficits do matter but it depends how long they last, how large they are relative to GDP, prevailing interest rates, and what the deficits are spent on.  Personal debt spent on a house or investment equipment may seem prudent, the same debt spent on a boat or jewelry would not.

While the debt incurred under George Bush was arguably bad, it was not a critical factor in causing the meltdown.  We incurred controversial debts under Ronal Reagan and incurred little repercussion from the financial industry.

Bubbles are nothing new and may just be a part of the pricing mechanism. The Federal Reserve was created to bring stability to our financial system. It first test was the Great Depression of 1929, and it failed miserably.  Nearly 80 years later with the value of the dollar down 95% and in the middle of the worst financial crisis in our adult lives, we should ask if it is part of the problem.

Eliminating commonly perceived causes should help us focus on solutions that will work. If we delude ourselves into blaming greed, deficits, and individual demons we risk designing solutions that not only will not work, but will like make the problem worse

“Could free markets have sorted out the mess without extraordinary government action? Yes, but only by destroying the remains of the financial system and possibly putting tens of millions of people out of work. Despite virulent public opposition to the Bush bailouts, society would not have tolerated the price that a sudden free-market correction of decades of financial excess would have exacted. The consequences of standing by while the markets did their work, correcting their own and government’s mistakes, would have been disastrous.”

“The administration’s response may have staved off depression, though that outcome is not assured. But the government has severely damaged four elements upon which free markets and the future well-being of the nation depend: prices, disclosure, failure, and fairness. Lawmakers and regulators have harmed the faith of global investors and regular citizens alike in American free markets- a faith essential to growth and progress. President Obama has made the problems worse.”

From After the Fall:  Saving Capitalism from Wall Street- and Washington by Nicloe Gelinas

If you have to read only one book about the recent financial  fiasco, this is it.

We tend to look at the increase in prices as inflation, but in a situation of fluctuations prices go up and down.

What if prices should be going down 3% but instead we see prices increasing 3%.  We see a price inflation of 3%, but it is really 6%.

How realistic is this?  Recent CPI numbers are down and such CPI adjusted payments as Social Security should be going down, or at least not going up.  But according to out president seniors should still get an increase. He proposed an increase for the misfortune of not having to experience a misfortune.

If you get a zero increase in payment when your cost of living has actually declined then you have in effect gotten an increase. Declining wages which we are esperiencing is very deflationary.

American economists and policy makers live in the fear and the shadow of the Great Depression and its devastating deflation.  European policy makers fear the runaway inflation that destabilized Europe prior to WW II.

With massive debt and government spending that is crowding out private borrowing, many wonder where the inflation is.

Perhaps it is just hidden.