Six Ideological Errors That Led to Financial Crisis

Princeton professor Alan Blinder identifies the 6 key policy errors that were the key elements in the financial crisis.

He especially notes that this was not a neccessary outcome of capitalism, but rather, was the result of six avoidable errors. And while the professor calls them “human errors” he himself errs — these were not merely cases of poor judgment, but rather, they were ideological errors.

As I noted in Bailout Nation, these decisions were driven not by pragmatic realism, not bad attempts at problem solving, but rather, due to an intellectual free market jihad. They were caused by a radical deregulatory zeal that could only be affected by “religious” ideologues:

WILD DERIVATIVES In 1998, Brooksley E. Born, chairwoman of the Commodity Futures Trading Commission, tried to reign in derivatives. She was shouted down by Robert Rubin, Alan Greenspan, and Larry Summers.

SKY-HIGH LEVERAGE In 2004, the S.E.C. let securities firms raise their leverage from 12 to 1 to 33 to 1 and greater.

SUBPRIME SURGE From 2003 to 2007, subprime lending grew unsupervised by the Fed into a large, dangerous credit facility. Lending standards fell disgracefully, as dubious transactions became common.

FIDDLING ON FORECLOSURES This is one where I mostly disagree with professor Blinder’s conclusions. Home prices remian dangerously elevated; Foreclosures are driving prices back to a more normalized range. Until prives revert to historical metrics, real estate will stay weak, and the economy soft.

LETTING LEHMAN GO Its not that letting Lehman Brothers fail was such a terrible decision — it was that there was no undferstandable difference between LEH and Bear Stearns. The inconsistency was part of the problem. Add to it, the idiotic managment of LEH, who should have asked for an orderly dissolution assistance from the Fed.

TARP’S DETOUR The Troubled Asset Relief Program was an on-the-fly, no strategic planning, seat of the pants, inconsistent mess.

Purchase bad assets? Recapitalize banks? Rescue homeowners? Jumpstart the economy? Just WTF was the point of TARP? Its morphed so many times no one has a clue . . .

Professor Blinder notes these were a series of largely avoidable errors — but he does not explain what types of errors they were. They were not due to greed, or miscalculation or even systemic regulatory problems. They were inavoidable errors caused by a faulty belief system.

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Source:
Six Errors on the Path to the Financial Crisis
ALAN S. BLINDER
NYT, January 24, 2009
http://www.nytimes.com/2009/01/25/business/economy/25view.html