[snip]
"Mistakes" are a useful conceptual tool for Stiglitz as he sets about explaining the boom and bust of the 1990s. Because he will not admit the existence of social classes as any kind of defining force in economics or politics, it seems that Greenspan and the U.S. Treasury Department, meaning Lloyd Bentsen (remember him?), Lawrence Summers, and Robert Rubin, were responsible.
[snip]
The creation of the '90s bubble was a function of deregulation, and Stiglitz's book details this well. The deregulation of financial institutions allowed banks to invest in and lend to the same corporations. A bank could and would hide the fact that a corporation in which it had invested was borrowing heavily, as that information would cause the value of the bank's stock to fall. Brokerage houses, analyzing and picking stocks for clients, could participate in mergers and acquisitions worth millions to them, involving the same corporations whose stock they sold. So even if the stock looked suspect, the analyst would still recommend it in order to keep the merger deals moving. Auditing firms, responsible for producing and publishing independent analyses of a corporation's financial status, could also serve as consultants for the corporation. Because their consulting contracts were so lucrative and because they had room to fudge, auditors became reluctant to publish financial information damaging to the corporation.
Notice the information asymmetries between the banks, the corporations, the brokers, and the auditors on the one hand and the public on the other. Notice also, that once upon a time these sorts of business arrangements were more commonly known as conflicts of interest, bribery, and fraud.
[snip]