That's right-blame government for greedy b5ggers lending shonky loans to people who quite clearly couldn't pay them back once the higher interest rates kicked in , and then selling the debt around the world to reduce risk to the lender. Classic greed at work, working a scam at the expense of the rest of us. Hayek was a tom-fool Austrian theoretical economist running on false logic. And good old Adam Smith gets a note-did he not also warn us against the greedy b$ggers of this world and suggest the need for their control? It was deregulation that gave us the 1929 crash. There is no such thing as morality in modern economics-it's devil take the hindmost and dump the cost of the risk on the superannuant and the small folk who get their life savings wiped out.

The CPI is not a direct measure of inflation, which is an increase in the money supply. The CPI is a very poor indicator as most people would agree after looking at their escalating household bills.

To Henry VII:
The 1929 depression was caused by the same problem as besets us now - a huge inflow of money from the FED in the USA, not deregulation. The US economy is much larger now but the results are likely to be similar, if not as extensive (I hope)

It is just as unreasonable to blame governments for everything as it is to blame markets for everything.

All those financial institutions who found too-clever-by-half ways of packaging up dubious mortgages into sophisticated and opaque new instruments have to bear some of the blame.

One of the key functions of markets is to put the appropriate price on risk. From time to time they fall down on this, and a financial crisis is the end result.

Robert G and Michael T,

I agree with you both. The current inflationary problems are fundamentally caused by too much money being created and the money being created being "isolated" from the risk associated with its creation.

Tell me what is wrong with the following idea and why it will not work

Money is created when we give a loan and do not loan with existing money. Money is destroyed when the loan is paid off.

We do not attach the reason why the loan was created to the money. That is one lot of money is exactly the same as another lot. What if we kept the reason why the money was created with the money. With electronic money this is easy to do.

When someone now uses the money with the reason for its creation attached to it then its value is better estimated because sooner or later it is going to have to be paid off. We now keep the risk associated with the money and when I go to use some money that was created as a loan to ABC Learning I might well discount it.

If we do this then perhaps we get rid of inflation as we know it because inflation is really punishing us all for the bad risk judgements of a few.

Technically this would be simple to do and the risk associated with each bit of money could be recalculated each evening

"Government actions have unintended consequences" And private sector decision do not? Is that the inference we are supposed to draw? It should be of some concern that we have a professor of economics who clearly has limited understanding of the mathematics that drives the rush to free market thinking. The USA had its most sustained and successful growth period when it had an interventionist government.(British) Laissez Faire economics of the 19th century very quickly collapsed as there was a clear need for government intervention to protect social cohesion. The free market would, in theory, work if all market participants had the capacity to fully evaluate all the factors inpacting on their decision. Tp argue that the failure of the sub prime market was due to a housing policy that limited new housing development is half right. Housing policy is a factor but so was the war in Iraq. As Stiglitz argues in his 3 trillion war - the Bush administration's choices about where to place public expenditure is also a significant factor - that 3 trillion could have been used to provide welfare housing (amongst many other things.) If this extract is supposed to be representative of the burden of Sinclair's argument then I hope that it is not representative of the quality of his reasoning when he teaches.

Oh, please!

Market worshipers, like climate change deniers and creationists, seem to require their own 'facts'.

There has been substantial evidence of fraud in the sub-prime affair.

Government inaction by market worshipers is also to blame. Regulation was called for and didn't happen. In addition it is true that the Greenspan Put (Greenspan another market worshiper) and the resultant low interest rates fueled a bubble in the housing market which made things worse. However, if market participants behaved like they do in textbooks then housing prices would never have reached the pre-collapse heights that they did. If borrowers were as smart as they are in the textbooks they wouldn't have borrowed loans they couldn't possibly pay, for properties that were grossly over-valued. If those buying bundles of sub-prime loans were as smart as they are in the textbooks they wouldn't have brought those loans. The fraudsters wouldn't have managed to perpetrate the fraud.