The origin of the credit crisis and global recession is explained in the Pittsburgh G20 statement by an “era of irresponsibility” in the form of excesses in risks and leverage in banks motivated by bankers’ compensation. The alternative view in growing professional literature and also in our seven books published by Palgrave Macmillan is that the crisis could have been caused by regulatory errors: the lowering of the Fed funds rate to nearly zero in 2003-4, collapse of mortgage rates by the elimination of the 30-year Treasury bond, the prolonged housing subsidy of $220 billion per year and the purchase or guarantee of $1.6 trillion of nonprime mortgages by Fannie and Freddie. These policies distorted risk/return decisions not only in finance but also by families, business and government. Interest rates near zero caused high leverage, low levels of liquidity and bad loans. The credit/dollar crisis manifested primarily in nonprime mortgages bundled in derivatives because the central bank created the impression of writing a put or providing insurance against falling real estate prices. House prices would increase but never fall below the level in the mortgage contract. Elementary economics concludes that subsidies cause overproduction of housing. The lowest interest rates in five decades created the impression that house prices would increase forever. Borrowers and lenders believed that the downside would be early repayment of the mortgage or sale at principal value in foreclosure. The sober approach is that of Functional Structural Finance (FSF) developed by Robert C. Merton and Zvi Bodie, which is ideology-free because the financial functions can be provided by the private-sector, government and family institutions. FSF posits that spirals of financial innovation, including structured products, academic landmarks such as Black-Scholes-Merton option pricing and risk-management techniques as by RiskMetrics®, improve the functions of finance required for economic growth. Excessive regulation can distort risk/returns decisions, preventing efficient financial functions, flattening the expansion path of the economy and preventing full employment. Carlos Manuel Peláez, 9/28/09 http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10