The Anatomy of a Murder: Who Killed Americas Economy - Research Paper Example

The Anatomy of A Murder: Who Killed America’s Economy? It is no doubt that the global economic crisis that occurred between 2007 and 2012 was the worst economic crisis after since the 1930s’ Great Depression. While the main causes of the global economic crisis are well- known, economists are still searching who to blame for the crisis. Joseph, E. Stiglitz, the author of an article in the Critical Review 21(2-3): 329-339 titled “The Anatomy of a Murder: Who Killed America’s Economy?” attempts to explain who actually “killed” the America’s Economy and therefore should be blamed for the global economic crisis. In this article Stiglitz presents compelling arguments on who killed the economy based mainly on the notion of causation. He argues that in order to find out who killed the economy it is important to know what or who caused the crisis in the first place. According to him focusing on the notion of causation will not only help in fixing the current crisis, but also help to figure out how to prevent another crisis in the future. In the first part of the article, Stiglitz begins by noting that the notion of causation is complex as it not only involves the actions of the guilty parties but also on the behavior of others in the face of the actions of the guilty parties (Stiglitz 329). Stiglitz gives the issue an analogy of murder, which actually he has used in the topic of the article. He argues that when considering the case of murder the following persons should be identified: the person who pulled the trigger; the person who sold the gun; the person who paid the gunman; and the person who provided the victim’s whereabouts. This is crucial because all these persons are party to the crime. Therefore, Stiglitz argues that all parties, both institutions and people who were party to the causation of global economic crisis should be identified. He goes on to mention the people and institutions who were party to this “crime”, either by act of omission or commission. They include: the investors; the regulators including the Federal Reserve and the S.E.C; string of administrations from Reagan to Bush; the credit-rating agencies; the mortgage brokers; and the investment banks. While the author believes that all the aforementioned parties contributed to the global economic crisis in one way or another, he believes that there are those who the blame should centrally be placed on; he says that “But I would argue that the blame should be centrally placed on the banks (and the financial sector more broadly) and the investors (Stiglitz 330).” This view is informed by his believe that the financial institutions and specifically the banks were supposed to be risk management experts, but they failed on this mandate. He vehemently disagrees with these institutions’ weak defense that it is their investors who made them to fail on their mandate. This is because the investors do not understand risk. In what Stiglitz refers as the “accessories to the crime” he points out banks were the main perpetrators of the crime, but with many accomplices. Stiglitz states that one of these accessories was rating agencies which greatly contributed to global economic crisis by providing ratings whose credibility were questionable. Another major accessory to this crime was the mortgage brokers who were less interested in originating good mortgages because they did not hold the mortgages for long. Besides, the author notes that home- equity loans encouraged customers to borrow against the equity thereby raising the total loan-to-value ratios which made mortgages to be more risky. The author also point out the regulators as being accomplices in crime. They did not recognize the inherent risks in the products that were being offered in the market. Also, they did not conduct their own risk assessments and were instead relying on credit-rating agencies or self-regulation (Stiglitz 332). He further argues that the financial regulators and regulation were not the only accessories to the crime; blame should also be apportioned to weaker enforcement of anti-trust laws. This resulted to banks growing to be too big to be managed. Along with that, he says that corporate laws should be blamed, partly. The investors and regulators seemed not to be aware of the risks that were engendered in the peculiar incentive structures. Whereas he acknowledges that the Sarbanes-Oxley Act that was enacted after the WorldCom and Enron scandals had tacked some of the corporate governance problems, he also acknowledges that it did not attack the fundamental problem of stock options which significantly contributed to the global economic crisis. In attempting to show who were to blame for the global economic crisis, the author points out on a set of accomplices he refers as the “credentialed accomplices.” According to him these accomplices include those economists who provided arguments that the financial markets players found to be so self-serving and convenient. This set of accomplices provided unrealistic models regarding the perfect markets, perfect competition, and perfect information (Stiglitz 334). He argues that these economists failed to use modern economic theories especially those relating to systematic irrationalities, asymmetric and imperfect information that explain how neoclassical models are flawed. Moreover, the author says that these economists ignored insights on how neoclassical models are not robust and that even the slightest deviation has the potential of destroying the conclusions. In other words, the author is of the view that most of the popular neoclassical micro and macro-economic theories abetted and aided policy makers, bankers, investors, and regulators to provide the rationale for their actions and policies. These groups of people were led by these set of economists that pursuit of self-interest was important in advancing the society’s well- being. Since those who have been blamed for killing the America’s economy have fronted defenses to discount the blame on them, the author has moved to rebut their defenses. For example he says that “Alan Greenspan (a regulator) has tried to shift the blame for low interest rates to China, because of its high saving rate. Clearly, Greenspan’s defense is unpersuasive” (Stiglitz 334). He rebuts Greenspan’s defense by stating that the Fed did not use the control that it had to raise the interest rates. He further rebuts this defense by saying that the low interest rate might have contributed to the global economic crisis, but that is not necessarily its impact. He cites his observation that most countries tend to yearn for low interest rates which is crucial in financing needed investment. However, the author argues that the financial markets did not do that because they did not channel the funds to productive purposes. Furthermore, he argues that if the low interest rates are to be blamed for the global economic crisis, then it is important to question what may have induced the Fed towards pursuing low interest rates. While the Fed argues that it was doing so in order to maintain the country’s economic strength, the author differs by arguing that interest rates is not the only tool at the Fed’s disposal in trying to achieve this objective (Stiglitz 336). The author goes further to acknowledge the fact that not all accomplices are equally culpable, and therefore some of the suspects to this crime should be acquitted. It is against this background that he attempts to defend the “innocent”. The key innocent suspect that he wants acquitted is the Community Reinvestment Act (CRA) which he argues that its mortgagors have below average default rate. After mentioning the key accomplices in the crime of killing the America’s economy, he notes that there is one very important culprit- the America political system which according to him played a crucial behind-the-scenes role in this crime (Stiglitz 338). He attributes this to the dependence of political parties on campaign contributions especially from the corporate institutions. As a result of this, Wall Street exercised enormous influence in pushing for watering down regulations and appointing the regulators who could be easily compromised. The author is worried that political interests are playing a considerable role in designing the effective ways of addressing the global economic crisis. The author argues that since the financial and political players implicated in the crime did not serve the national interests but rather special interests, the crisis occurred in America’s political and economic system. Finally, the author is of the view that effective reconstruction of the economic system can only happen if the regulatory reform is pushed. However, he is skeptical that even such a regulatory reform may not be real but rather cosmetic. He observes that the banks that are too big to fail may be allowed to undertake little changes. He also observes that while there will be “oversight” banks would still have room to gamble and continue to be too big to fail. Besides, accounting standards would be relaxed to give banks a greater leeway and little will be done concerning the risky practices or even incentive structures. If this will be the case, he is predicting that another crisis will surely follow (Stiglitz 338). It is clear that the author has made great efforts in making his article clear. The author achieved the objective that he had set forth, creatively. The author has used a good analogy in respect to the global economic crisis; a creative departure from the plain analysis that most authors tend to give this subject. The use of the sub-topics such as: the main protagonist; accessories to the crime; and credentialed accomplices brought out clear understanding of the topic under review especially from the notion of causation. Also, he went further and strongly rebutted the defense that had been fronted by the accomplices to this crime. For example, he showed how trying to shift the blame for low interest rates to China was a weak defense. Moreover, defends the “innocent” and argue that they should be acquitted. He also shows how political interest was central to the crisis. The conclusion of the article that, if the regulatory reform will be cosmetic, then the crisis will re-occur in the future is very valid. He categorically states that this will happen because banks that are too big to fail will be allowed to go on with little changes. He also supports this conclusion by arguing that relaxing of the accounting standards will give the banks a greater leeway leading to the re-occurrence of the crisis. He further points out that little will be done regarding incentive structures and risky practices thereby leading to the re-occurrence of the crisis in the future. I have a very high opinion on this article. The article has comprehensively and creatively described the global economic crisis based on the notion of causation. Unlike most of the articles relating to the subject of global economic crisis, this article takes a particular approach on the crisis and dwells on it comprehensively; the author believes that a better understanding of the crisis can only happen if economists understand the causes of the crisis. Similarly, he says based on the notion of causation the long search by the economists on who to blame will come to an end. I concur with this argument of the author. Another reason why I have a very high opinion of this article is because it is based on economic principles; the author recognizes that there was need for economists to carefully use neo-classical theories because modern theories have proved that these theories are flawed in conclusion. Such a realization is fundamental in not only enriching the micro and macro-economic knowledge, but also in creating awareness that economic problems should be looked from a wider perspective. However, this article failed to comprehensively show how the political interest contributed to the crisis and how the problem can be solved from both the economic and political angles. That notwithstanding, I believe that the article was of high academic standard as it was well- researched and the arguments presented were well-supported. More importantly, the article called for real regulatory reform that will prevent the re-occurrence of global economic crisis. It discouraged against cosmetic regulatory reform. Works Cited Stiglitz, Joseph. “The Anatomy of a Murder: Who Killed America’s Economy?” Critical Review 21(2-3), 2010: 329-339. Read More