Capitol Hill Blue Forums Political Issues Finance, the economy & Economics How will the financial crisis develop?

The roots of the panic in financial markets around the world are deep and complex but they lie in the convergence of three factors.

Millions of people pursuing the "American dream" of home ownership, politicians and regulators who dismantled a system of financial safeguards and then ignored warnings of impending disaster and financial markets and institutions disregarding risk in their headlong pursuit of profit.

But something else was at work as the housing bubble grew: The US government, under the sway of the free-market, anti-regulation ideology, had begun to systematically dismantle rules and regulations established after the Great Depression of the 1930s.

In 1999, the US congress and Bill Clinton, the former president, repealed laws designed to stop financial crashes - saying markets should regulate themselves.

Why?

Lawrence Mitchell, the author of The Speculation Economy: How Finance Triumphed Over Industry says it was the triumph of ideology over caution.

"Since Ronald Reagan became president in 1980, free markets have been preached in this country as being our economic salvation," Mitchell says.

" 'Government regulation' we've been told, 'is bad, it's evil, and the government doesn't know what it's doing economically'."

" 'It should be out of people's business'. That's nonsense, but that was the ideology that was driving it. 'Regulation is bad, free market is good'."

The problem then was not, and is not now, about houses. It's about credit — or the lack of it.

With so much bad debt out there - and no one really knows how much there is - banks around the world have become extremely risk-averse.

They've stopped lending money to individuals, businesses and even each other.

Unable to get loans, Lehman Brothers, the fourth-largest US investment bank, went belly up.

Central banks have by now pumped hundreds of billions of dollars into the global financial system, but the flow of credit, known as liquidity, has slowed to a sluggish trickle.

For the first time since the 1930s, a true, systemic financial crisis is under way. 

That's why the US government is considering sweeping and costly measures to buy up millions of bad mortgages.

But while the plans announced late this week seem to have boosted confidence on Wall street, no one really knows what will happen next.

"It could get a lot worse, said Mitchell, gloomily.

"I haven't read any significant empirical evidence to suggest we are anywhere near the bottom."

"Where's the bottom?" I asked him.

He replied: "The bottom could be very deep."

"I really don't want to know."