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Bill Mitchell on the causes of the global financial crisis

Bill Mitchell on the causes of the global financial crisis – Editor

A recent blog by Prof Bill Mitchell [1] has listed the causes of the global financial crisis (GFC) that everyone became aware of in 2008, when stock markets all over the planet crashed. According to Mitchell:

“The GFC was the culmination of a long build-up of destructive forces, which resulted from the ideologically- motivated financial market deregulation, that exposed the dysfunctional and unproductive nature of so-called self- regulating financial markets. But there was little ‘self-regulation’ on show.

Rather:

  1. The incentive structures set up for senior bankers encouraged high risk excess.
  2. The ratings agencies were relied on to provide guidance to these investors but were engaging in criminal and incompetent behaviour whereby they were being paid by companies to rate their products favourably – thus providing no sound guidance at all.
  3. Various statistical techniques promoted by economists who believed in the ‘efficient markets’ theory to evaluate risk were hopelessly inadequate for the task (as was the theories they advocated).
  4. A range of new ‘financial’ products were created that bore no relationship to the real economy (where ordinary people live and work) which were impossible to comprehend and assess(for risk) from the perspective of the investor (individual or institution).
  5. Fraud and deception were common in the financial sector. “

These systemic failures were crucial factors In the run-up to the global financial crash of 2008, but were only part of the overall story. Thus according to Mitchell:

“They were part of the neo-liberal mania that dominated the world’s economic and social policy making since the 1980s (before in some nations).

“The global nature of the crisis arose because over the last 2-3 decades most Western governments succumbed to the neo-liberal myth of fiscal austerity and introduced policies which allowed the destructive dynamics of the capital- ist system to create an ultimately unsustainable economic structure.

“Once that instability began to manifest it was only a matter of time before the system imploded. ”

Source 1. Billy Blog http://bilbo.economicoutlook.net/blog/? p=34118#more-34118

Dr Bill Mitchell is Professor of Economics and Director of the Centre of Full Employment and Equity at University of Newcastle, and is on the board of CofFEE- Europe, a sister centre located at the University of Maastricht.

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