Ann Pettifor is the author of The Coming First World Debt Crisis (2006) and correctly predicted an Anglo-American debt-deflationary crisis in The Real World Economic Outlook (2003). She had the fifth most votes for the Revere Award (among the individuals that "most cogently warned the world of the coming Global Financial Collapse"). Pettifor is currently Director of PRIME - Policy Research in Macroeconomics (more on Pettifor at Wikipedia). She blogs at Debtonation.org.

1. Which FCIC View best represents the causes of the Financial Crisis?

Majority Conclusions

2. Which narrative presented by Douglas Elliott and Martin Baily of the Brookings Institute in Telling the Narrative of the Financial Crisis: Not Just a Housing Bubble best represents the causes of the Financial Crisis?

It was the fault of the government – i.e. regulators. No doubt Wall St. played a role in the de-regulation of Wall St…but in the end, laws are voted upon and decided by legislators. The buck stops there.

3. I believe the crisis is ongoing and I project the Global Financial Crisis will end in the year

2013 or beyond.

4. What were the primary causes of the Global Financial Crisis?

The primary cause of the Global Financial Crisis was the de-regulation of credit-creation; of interest-rate setting and of capital mobility. All of these were triggered by changes that took place in and after, 1971 when a) President Nixon unilaterally dismantled the Bretton Woods System, which however flawed, nevertheless set a regulatory framework for maintaining a balance between surplus and deficit economies, and for regulating and restraining the mobility of capital. By doing so the United States defaulted on its obligation to repay debts in gold – at that point the biggest default in history. b) When in the UK (and almost simultaneously I believe in the US) the Bank of England and the British Treasury began to dismantle controls over credit-creation and interest-rate setting, with the introduction of ‘Competition and Credit Control’ (widely dubbed: “all competition and no control”).

The result of this de-regulation of both financial flows and private credit-creation was the expansion of a credit bubble ‘vast as space’ to quote a 19th century economist, used to fuel asset prices, while simultaneously wages and prices were suppressed by ‘monetarist’ economic policies. Western economies then lived through three decades of ‘easy’ but ‘dear’ credit. Credit was easily come by, but was offered at high, real rates of interest – rates that ultimately bankrupted whole economies.

Contrary to much myth-making the direct cause of the crisis in 2006/7 was high, not low rates of interest. Interest rates, which had been high in real terms for two decades before the crash, had once again been lowered *in reaction* to the bursting of (yet another bubble) the 2001 dot-com asset price bubble…but after a short period rates then marched determinedly upwards – to point a dagger at the ‘vast’ credit-fuelled asset price bubble built up over 30 years. The bubble of debt finally began ‘debtonating’ after February, 2007. De-leveraging of this vast debt bubble continues apace.

5. What still needs to change as a result of the crisis?

Vast amounts of private household, corporate and financial sector debt needs to be paid down/written off/de-leveraged. Government should be ensuring that this de-leveraging takes place in an orderly way. Instead, the process is taking place chaotically…..Second, the private finance sector needs to be re-regulated. Banks may need to be nationalised if taxpayers are asked to carry the full burden of their losses. Third, capital mobility must be restrained if central banks are to regain control over the whole spectrum of interest rates – short and long, real, safe and risky. Low rates of interest are vital for the restoration of sound economic activity, and to enable entrepreneurs to remain profitable after borrowing to invest. “Tight” but “cheap” credit must be the future: that is credit for viable economic activities, not speculation, at low, sustainable rates of interest. In the meantime central banks and governments have to play a role in reviving economic activity in economies depressed by vast debts.

See also Eight fallacies in the LSE Keynes/Hayek debate and The game is up: the age of liberal finance over. The Left's Plan B?

Compiled by Gary Karz, CFA
Host of InvestorHome

Global Financial Crisis Survey

Please send suggestions and comments to Investor Home

Last update 11/24/2011. Copyright © 2011 Investor Home. All rights reserved. Disclaimer