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The Financial Crisis Post-Mortem: Suicide, Accident or Murder?

January 12, 2010

by Michael Skocpol

Since the stunning collapse of America’s financial system in 2008, questions have swirled around how we got here and who’s to blame. The subsequent finger-pointing has yielded few answers, but now one economist has taken a cue from CSI’s Gil Grissom and Law and Order’s Jack McCoy.

Ross Levine
Ross Levine

He performed an autopsy.

For Ross Levine, the James and Merryl Tisch Professor of Economics at Brown University, too much time spent analyzing the minutiae of heated decisions made in September 2008 obscures a more interesting question: did the underlying factors that precipitated the collapse constitute a suicide, an accident, or a murder? Did investors’ irrational behavior lead to their own demise, was the government somehow responsible, or was it all just an unforeseeable tragedy? Pouring over publicly available records, media accounts, and government documents, he came to a surprising conclusion, one which he recently presented to officials at the International Monetary Fund and the World Bank.

His verdict is negligent homicide.

“There was an element of suicide in the sense that there was a bubble in housing, and people were behaving irrationally, exuberantly,” explains Levine, who directs Brown’s William R. Rhodes Center for International Economics and Finance. But dropping the inquiry there, he says, ignores a trail of evidence that, in the decade leading up to the crisis, federal regulators were well aware of the dangers and warning signs – and negligently chose not to act.

“The authorities had lots of information that would have dramatically reduced the probability of an accident and the opportunity for suicide,” he says.

Levine’s detective work has focused on how financial regulation affects financial system performance and economic growth around the world. He was compelled to take a closer look at the circumstances surrounding the financial crisis because he believes the current narrative that has emerged in Washington – that the sudden crisis in 2008 was unpredictable, and the Fed and other regulators reacted as best they could while facing tough decisions and constraints in the heat of the moment – doesn’t tell the whole story.

The focus on 2008, Levine says, is like following the wrong lead. “In emphasizing that the crisis was an accident, the authorities correctly note that it was impossible to predict that this was going to happen in September of 2008,” he says. But “the real question of long-run significance is why over a five- to ten-year period leading up to the crisis, during a period of calm when there was time for serious debate, were so many serious mistakes made that ultimately produced this crisis?”

Over a long period of calmer conditions, Levine says, the authorities made very bad decisions – it was as if they handed inebriated markets a loaded gun, one might argue. “This is not part of the general story one hears in the popular press,” Levine says.