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Freefall Joseph E. Stiglitz comments upon the first chapter: The making of a crisis by NISTOR Simona - Diana
A new face of the American Dream: everyone has its own house, can access a credit and it doesn t matter they don t have enough money to pay all the installments because somehow they will manage to survive. Money for retirement and for child s education, well there will be recovered

somewhere in the future because now it s time for investments and the government assures everybody that it s the best decision. Managers, investors, banks, everybody with money in its accounts didn t want to lose the opportunity of gaining a lot of money especially now, when people are willing to spent (even the money that don t belong to them). To be an efficient company it s not a must because the government supports the market. And now, we are wondering how all these happened let s see what Stiglitz says: It all started in the US when people wanted a house they can t afford it, a house with a price smaller than the mortgage they had to pay. But those people wouldn t even dream at a house of their own if someone wouldn t gave them the opportunity considering their stagnating income. They act like their income was increasing when all the money they spent were not real, were borrowed from the banks. All of this combined with low interest rates and lax regulations fed the housing bubble. In this condition a lot of speculators appeared, the house prices were increasing and people with some courage bought the house at a small price and sell it to a higher one But these prices . couldn t grow for ever so that at a certain time the decline started: investors with their bank accounts empty, people with expensive mortgages to pay, banks unable to give other credits to those who needed, not even to themselves. What said the government? Ups I did it again Stiglitz draws our attention upon the fact that the crisis begun even since the dot-com period that took America into recession. At that time, President Bush applied tax cuts for rich and this stopped the investments in the dot-com field and moved to housing, where low interest rates allowed consumption and real estate boom. This combined with a high price for oil, bad mortgage products, the lack of regulation in the field turned the economy weaker. The Wall Street firms were concentrated on maximizing their own returns; they put on the market mortgages with high transaction costs and variable interest rates and didn t take care of a possible loss in home value or the risk of job loss. For them it was perfect on the short run because they made a lot of money and respected the governments will of increasing the homeownership but this lead to an enormous cost for the entire society. The banks ignored their role on the market in providing efficient payments mechanism and to manage the risk for the loans. In this case, there would be enough money to start

6 Freefall Joseph E. and in thirty years. to a robust growth based on solid foundations. The ingenuity of man knows no bounds.Dec. Stiglitz comments upon the first chapter: The making of a crisis by NISTOR Simona . the banks complained that the money were too cheap and they did only what the government asked them. the banks for their greed. and regulations designed for today will work imperfectly in the economy of the mid-twenty-first century. Now that all of this happened. to promote quality instead of quantity. confident that it will not fall prey to the problems of the past. the investors didn t paid attention to risk because the rating agencies encouraged them to buy. They were totally wrong because the Fed didn t act on time and let the bubble broke. America s financial markets created risks. The Fed shouldn t sustain banks and companies that are not efficient and act only for themselves. But in the aftermath of the Great Depression. to increase the growth of the economy. Who is guilty? The government by its decisions. promoting growth and stability. misallocated capital. to be enough jobs for the people and to convince people with money to put it on a bank account to be invested. the only way of recovering after the crisis is to design a system that will lead to a sound economy. . And when all these happened they started to blame everybody but not to admit that themselves made a mistake: people from the financial sector called this crisis as an accident or it s the government s fault for allowing low interest rates for a too long time. and to pay attention to risk and money gained to easy. encouraged excessive indebtedness while imposing high transaction co How could they sts. to expand the old ones. This book is written in the hope that we can do so again. There are a lot of guilty people in here. the mortgage companies and the rating agencies that encouraged all these credit packages. Who could have foreseen the crash? Stiglitz and other great economists expected this will happen but nobody listened to them because they didn t want to think to a crash in the moment when everybody had money. do this? Easy because they were sure that the Federal Reserve and the Treasury would bail them out. everybody should do his job perfectly in order to sustain a healthy economy. we did succeed in creating a regulatory structure that served us well for a half century. the managers who thought that the prices will increase over and over. When a lot of innocent people are involved. a new generation will emerge.Diana a new business. And how Stiglitz mentions in the ending of the Preface of his book: Memories are short.

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