Top Five Causes of the Financial Crisis

- By Kevin Yu

1. Alternative Realities: The Black-Scholes Revolution
When a market is crashing and no one is willing to buy, it’s impossible to sell short. If too many investors are trying to unload stocks as a market falls, they create the very disaster they are seeking to avoid. Their desire to sell drives the market lower, triggering an even greater desire to sell and, ultimately, sending the market into a bottomless free fall.

2. Blind Faith and/or Greed
Greed–the model had the potential to make enormous sums of money for traders, managers, execs and others in the short-term. And it’s not all Wall Street greed. Ordinary Americans continued to pump money into the system, continued to buy beyond their means. The primary motivation of many was to make a quick buck, even if it meant creating bubble that would clobber everyone in the long term.

3. The Greenspan Put
From the late 80s to the middle of 2000, the myopic Alan Greenspan instituted a policy of lowering interest rates every time there was a hint of a financial crisis. It was reactionary, and robotic. Economic restraint was something Greenspan could not comprehend.
The low interest rates made loans cheap, and housing seem cheaper, creating more demand, increasing prices, and so on. After a while, pervasive blind faith set in.

4. Financial “Modernization”
Many in Congress argued that the repeal of Glass-Steagall would create conflicts of interest, lack of transparency and megabanks that would become “too big to fail.
No one made sure the banks and hedge funds had the assets to cover the losses they guaranteed.

5. Groupthink And Conformity Psychologist Irving Janis defines Groupthink as “the mode of thinking that persons engage in when concurrence-seeking becomes so dominant in a cohesive in-group that it tends to override realistic appraisal of alternative courses of action.”

Sources:

1. http://topics.nytimes.com/topics/reference/timestopics/subjects/c/credit_crisis/

2. http://postpartisannews.com/?p=924

3. http://www.tridentpress.com.au/prod138.htm