You are right. You can’t blame one institution or the Government. Warren Buffet blamed the instrument itself. Way back in 2002 he famously predicted ” Derivates are the financial weapons of mass destruction”
No body listened to the old man as they were too engrossed in making money. So much so that by 2005 the Banking industry was so swamped with demand that they began issuing the derivatives without even having time to do the background paperwork for the securitization. When things got out of control Tim Geithner, then head of Federal Reserve pressed the top 15 financial firms who were issuing the derivatives to build an electronic network for recording of these instruments which was completed only by the third quarter of 2006. By then the damage was done. Some details are available at http://www.ecothrust.blogspot.com on both
Buffet’s opinion & Geithner’s role.

The issue, as in the Great Depression, was a massive downcycle due to a multiple institution fault. Even in the GD it was the Bank failures of 1907 which created the crisis of 1929 largely due to improper regulation by the Government which Friedman points to. The Government as now failed to meet its only responsibilty that was primarily “TO REGULATE” . Surprisingly it fails to do so even today after the Sept crash. The farcial stress tests by Banks themselves without external auditing is another example of failure of the Regulator, that will only help prolonging the misery. The fact is that cyclic ups and downs are natural, but only when you artificially manipulate the up cycle the down cycle hits you harder.

Hi Sen,

Thanks for the comment.

I am not sure I would completely put the responsibility for the depression down to government – after all, large recessions and booms were prevalent well before we had centralized monetary and fiscal policy.

Understanding how monetary and fiscal policy fit in with economic ebbs and flows is important – and is an issue we still have work to do on. But I don’t think we can solely put blame down on a single institution.

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Nice blog. Here are some differing views of the Milton Friedman who assessed the GD closely and clinically. It looks similar to the current
day happenings.

In the Chapter ” Anatomy of Crisis” of the Great Depression, Milton Freidman in his popular best seller ” Free to Choose ” clearly says that during the 1929-34 period
” the Keynesian revolution not only captured economics profession, but also provided an appealing justification and a prescription for government intervention.
The shift in opinion of both the public and the economics profession resulted from a misunderstanding of what had actually happened. We now know, as few knew then , that the depression was not produced by a failure of private enterprise , but rather a failure of government in an area where the government had from the first been assigned responsibility —- To coin money, regulate the Value thereof and of foreign coin”

Freidman goes on to say in the Book that wrong government intervention & “subsidising the inefficient policy” propped up “The Knickerbockers Trust company” and many banks in 1907 creating a Federal Reserve system that created arbitrary rules on restriction on withdrawal of deposits , that collapsed ultimately in 1929 to create a much greater and long drawn depression.

The present day crisis has roots similar to the great depression.
Once again it is probably the government intervention & “subsidising the undeserving policy ” policy that is precipitating the crisis. By propping up the security & mortgage arms of monolithic banks & insurers such as Citi & AIG it is putting pressure on the already distressed citizen tax payer. If Banking or Insurance operations and derivatives business are segregated the problem will largely dissapear from the core functions of these companies which could go about the daily business normally. The derivatives business then must be examined closely, one large part of which would be the subprime mortgages that have been securitized. This part must be either
dis entangled and scrutinized or written off en block. It is illiogical to repeatedly try and sell these toxic mortgages as securities in the market knowing that they would mutate and collapse in future under the weight of their toxicity.
The US Governments , the Fed & the Treasury’s persistance with the disposal of the sub prime housing mortgages first by securitization and now by the public private partnership is simply baffling and shall only prolong and deepen the crisis, by the next quarter.

Investment Guru warren Buffet had predicted in 2002 that these derivatives are financial instruments of mass destruction
More on the subject at http://www.ecothrust.blogspot.com , a recent
blog on ecology and economy.