Financial Crisis

A bunch of look-backs at the financial crisis have come out recently because Lehman failed almost a year ago. Too many of these describe that as the tipping point, but I completely disagree. The problems began in early- to mid-2007. In August 2007, the financial markets froze. That was the first big warning sign and it freaked everybody out. Not too long after, we thought we were passed the rough spots. In January 2008, the Fed unexpectedly, even before its scheduled meeting, cut interest rates by 75 basis points.

An important mea cupla:
At the time and for a while after, I thought this was a terrible idea. I was afraid of inflation, which turns out was not at all an issue. Boy, was I wrong.

Anyway, it's important that people understand the crisis, and I think news outlets, hungry for a narrative with good guys and bad guys, are distorting the events. Much of what happened, the really interesting parts, don't really have isolated actors, but are systematic occurrences that we need to understand.

Unfortunately, I don't think Obama's financial regulation is focusing on the right things. They've bought into the notion, partially because I think it resonates with their ideological position, that the banks were entirely responsible and that was due to greed. I agree they were responsible and part of it was due to greed, but it was stupidity as well. Furthermore, the people who bought homes they couldn't afford are not blameless either. They should've known they couldn't afford the homes. Now, some will respond that the banks are in the business of knowing these things. Fine. But it takes two to tango and Obama's regulation to protect consumers from financial companies rings false as a solution to prevent future crises.

Crises don't happen just because banks are greedy and dupe unsuspecting borrowers. Banks are always greedy. Crises happen because everybody thinks this time is different. Everybody thinks that the bill won't come due. No money down? No payments for 36 months? Where do I sign?

My point isn't really to defend the banks by blaming consumers. It's to say that we are all responsible for this. We succumb to these delusions, sometimes even mass delusions, because we are human beings. No amount of regulation is going to prevent people from finding ways to make money and then exploiting it to its greatest possible extent and then other people rushing in to take advantage as well and thus leading to a bubble. Regulation may be able to prevent what happened this time, but as financial history teaches over and over, each crisis is different. People adapt to the regulations and new problems occur. This isn't to say that we don't need regulation. We do. It's just a matter of finding the right regulation.

To be honest, some of Obama's regulation is probably a good idea. It's just some of the language surrounding it and the narrative building up in the media and among progressive groups that the evil, greedy bankers were entirely to blame that bothers me. They were to blame, no doubt about it. But so was the public.