The root cause of the financial meltdown is perpetuation of the prevailing financial system, based on second-best (inefficient) policies, by deliberately suppressing truths about the existence of first-best (efficient) policies.

The promoters of the prevailing system have drawn support from second-best policy research (published in top journals and won Nobel Prizes) to claim falsely that first-best policies are not feasible. The promoters of the prevailing system and the experts fave failed and caused a manmade financial crisis, according to the Financial Crisis Inquiry Commission Report released in January 2011.

That first-best policies, presented to the Federal Reserve since 1991 and to the Congress since 2003, are designed to beget first-best status for principals (citizens).

Mr. E. J. Dionne, Jr of Washington Post says eloquoently:

"A ruling class closed to new talent doesn’t remain a ruling class for long." 

This is pertinent in the context of the email conversation I had today with the American Enterprise Institute Fellow who was a dissenter in the U.S. Financial Crisis Inquiry Commission about the root cause of the crisis.

The elite tells that the financial crisis is due to irresponsibility of borrowers, without bothering that at any point in time, factually, total credit equals total debt.

How were the lenders suffused with an abundance of credit to lend?

The elite is grumbling about government housing policy forcing banks to lend frivolously.  It is not addressing the root causes of the crisis: (i) how the expanded credit was created, globally, for the US Banks to lend it to American Businesses and Households frivolously and (ii) whether the lending rates were indeed artificially exorbitant (usurious) considering (a) the subsequent precipitous fall in the rates and (b) massive supply of credit in relation to the demand for it.

Frivolous lending standards and on fudging of records by many borrowers are true.  But these are symptoms of the true underlying malaise, global expansion of credits.

My analysis during the pre-crisis period showed that the rates of interest at which the American households and businesses were locked up were significantly higher than that could be possible if the macro data fed into the Federal Reserve were not based on manipulated markets.

When the Fed funds rate was hovering at around 6%, I had challenged in memos to the President and Congress (i) that the Federal Reserve model for setting interest rate was feeding market-manipulated data, (ii) that the true interest rate should be near zero percent because of a looming depression lurking under the veneer of government-hooted economic growth and (iii) that the Fed would be forced to reduce the rate to near zero percent.  The Fed actually reduced the rate to near zero percent within a few months after it understood from my memo the underlying mechanics of market manipulation and how the market data so produced and fed into Fed's decision making was useless.

So, if the equilibrium rate was near zero percent, why should businesses and households be locked up at 6+ percents (had it not been for market manipulation)?

The economy is locked up in those high rates of interest and the Federal Reserve has no tools to get it out of the ditch, while the fiscal imbalance looms large.

To continue discussion further, you need to first read all my research and research-based memos available at pro-prosperity.com

Why is the ruling class (media included) blocking publicity of truths discovered through research based on a general equilibrium model of economics, which is more general than any other model ever scripted in the literature?  Why?  Will a ruling class closed to new talent cease to be the ruling class for long, as Mr. Dionne says?

Dr. Sankarshan Acharya
Director, Center for Constitutional Capitalism
Founder, Pro-Prosperity.Com and Citizens for Development