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The Sources of the Financial Crisis

October was a month of breathless financial reporting.  There was a lot to be breathless about – the markets were crazy, day after day after day.  I know that every editor told every reporter “Explain why this is happening!” It was what the readers wanted, and hell, it might even land a Pulitzer if you got it right.

What happened was that everyone who had an axe to grind brought it out for sharpening.  Depending on who you talked to, the problem was:

  • unrestrained greed of individuals and corporations
  • politicians who demanded that low-income citizens be able to purchase homes they ultimately could not afford
  • deregulation
  • excessive regulation

Each one of those explanations left me unsatisfied.  The arguments were all made by the usual suspects, making the usual, predictable arguments.  “Sure, that might be part of the problem,” I said to myself, “but that’s too glib and leaves too much unexplained.”

So far, I think that Michael Lewis is closest to the real truth.  We’ll see if history agrees.


Comment from Stefan Sherwood
Time: November 26, 2008, 11:58 am

This all points to the problem of greed in a pure capitalist environment: you can’t compete with dishonest practices. If one company — actually usually boiling down to a small number of dishonest individuals — is willing to trade temporary personal gains at a high risk to the company’s future by offering low-rate loans and/or packaging risky investments as safe investments you cannot compete. It’s tantamount to playing chicken with the investors.

Comment from Charlotte
Time: November 29, 2008, 10:41 pm

Appreciate your assessment and the link. Clearly, it’s all a bunch of bull 🙂 Lesson to be learned [again] is diversify, be agile, don’t put all eggs in one basket, prepare for the worst – and the best.

Comment from dunster
Time: November 30, 2008, 3:04 pm

Charlotte – Yeah, I agree – you’re playing with fire if you put all your cash into any financial vehicle – especially a newish one.

Stefan – I don’t follow how greed is the cause in the context of dishonesty. If someone is dishonest, is greed the problem, or is it the dishonesty? Dishonesty screws up just about any environment. If you’re optimizing for dishonesty, you’ve got a whole bunch of other problems

(sorry for the slow comment approval – I thought I did it earlier, but it was still in the moderation queue!)

Comment from Stefan Sherwood
Time: December 4, 2008, 2:40 pm

It’s one thing to knowingly make risky loans. But once these banks realized that they could used repackaging of loans as a way to shovel their garbage onto unsuspecting financial institutions they started making it central to their business plan.

The dishonesty has always been there but it is greed that led to the collapse.