Risk and Uncertainty

Politicians and talking heads on television are continuously reminding the public that the current economic crisis that began in 2007 as a small sub prime mortgage default problem in the United States has created the greatest economic catastrophe since the Great Depression. As I pointed out in two recent articles (Davidson, 2008a,1 Davidson 2008b,2) it is the deregulation of the financial system that began in the 1970s in the United States that is the basic cause of our current financial market distress. Yet for more than three decades, mainstream academic economists, policymakers in government, central bankers, and their economic advisors insisted that (1) government regulations of markets and large government spending policies are the cause of our economic problems and (2) consequently, the solution to our economic problems is to end big government and freeing markets from government regulatory controls In an amazing “mea culpa” testimony before Congress on October 23, 2008, Alan Greenspan, the former chairman of the Federal Reserve of the United States, admitted that he had overestimated the ability of free financial markets to self-correct and he had entirely missed the possibility that deregulation could unleash such a destructive force on the economy.