The endogenous nature of the subprime crisis

This chapter shows that the thesis whereby the current crisis is an accidental phenomenon, caused by the mistakes made by US government, Federal Reserve and the US banking system, has no meaning. It describes the endogenous nature of subprime mortgage crisis. The chapter also points out that, while economic crises are endogenous phenomena, they are not inevitable. In fact, they cannot be compared to natural events such as earthquakes because they are a consequence of the economic decisions taken by the various stakeholders of a society. This difference has major consequences. In fact, earthquakes are not only unpredictable but also inevitable. This means that the probability of their occurrence is completely independent from the theories developed by seismologists to explain their origin. This is not true for economic crises; the likelihood of their occurrence is not at all independent from the way that economists theorize the functioning of a market economy. The elaboration of a theory whereby a catastrophic crisis cannot occur has increased the outbreak of the Great Recession in two ways: 1) it led economists to completely underestimate the signs of instability that emerged during the Great Moderation; 2) it fostered behaviours and choices that paved the way to the crisis.