The Burden of Our Times
A crisis becomes a disaster only when we respond to it with preformed judg-
ments, that is, with prejudices.—HANNAH ARENDT, BETWEEN
PAST AND FUTURE
An accomplished businessman, one deeply involved in the housing industry, wrote me when I solicited his views on the intellectual causes of the financial crisis. The cause of the crisis is really quite simple he said: Cheap money—the combination of low interest rates, lax regulation, financial innovation, and excess leverage—led to unprecedented speculation.
From an economic point of view, the cheap money hypothesis is unassailable. But in a volume on the intellectual origins of the financial crisis, we need to go further. For starters, we might ask: What is cheap money?
Cheap money means money that can be borrowed at little cost. When interest rates are low, those with money have no incentive to keep it in the bank. When low interest rates are combined with lax regulations, the chances of successful investments are increased, and incentives for risky speculation are increased. In an era of cheap money, saving is discouraged, and speculation is encouraged.
If cheap money is behind the bubble, what is behind cheap money? And when did the era of cheap money begin?
Some, like Charles Morris, say it began in the aftermath of 9/11 and the bursting of the technology bubble, when the Federal Reserve reduced the federal funds rate to 1 percent and kept it there until 2004, financing the bubble in housing prices that lasted until 2007.1
Others, like George Soros, say that it began with the free-market fundamentalism of the 1980s. Globalization, deregulation, and financial innovation led to an unprecedented increase in leverage and speculation. Credit market debt in the United States exceeded 350 percent of GDP in