What Caused The Global Financial Crisis according to Dean Baker

The Global Financial Crisis according to Dean Baker

Dean Baker is co-director of the Center for Economic and Policy Research, author of multiple books, and a prolific columnist. He was voted to be one of three top economists who if the powers of the world had listened to, the Global Financial Collapse could have been avoided. Noteworthy articles include The Run-up in Home Prices: A Bubble (2002), Who to Blame When the Next Bubble Bursts (2003), and Bush's House of Cards (2004). His books include Plunder and Blunder: The Rise and Fall of the Bubble Economy (2009) and False Profits: Recovering from the Bubble Economy (2010).

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?

The biggest villains were Wall Street, however regulators and especially the Fed had all the power needed to shut the bubble down before it became so dangerous.

3. The Global Financial Crisis ended (or will end) in the year
There are multiple crises, but the way Europe is going the answer is probably beyond 2013.

4. What were the primary causes of the Global Financial Crisis?
The problem really is not a financial crisis. The problem was an economy driven by housing bubbles. When the bubbles burst there was nothing to replace the demand. In the case of the U.S. the demand lost by the plunge in construction and the loss of bubble-driven consumption was equal to about 8 percentage points of GDP. We have no tools that allow us to easily replace 8 percent of lost GDP, regardless of how well the financial system is working. We would be in pretty much the same place today if the bubble had deflated and there had been no financial crisis.

5. What still should change as a result of the crisis?
We need economic policymakers who believe in accounting identities. The fundamental imbalance in the economy is the trade deficit. The $600 billion trade deficit (it would @$900 billion if we were near full employment) logically requires either a large budget deficit or negative private savings. We teach this in every intro class. If the people at the Fed, CEA, and Treasury understood it, we would have much better economic policy.

Compiled by Gary Karz, CFA
Host of InvestorHome

Global Financial Crisis Survey

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