Here it is, one year later, and we continue to hear an enormous amount of misinformation about the Credit Crisis: What were the actual causes, what could have been done, what should have been done.
Lets consider the most widely held myths as the the cause of the crisis (skipping discredited nonsense).
Here is a quick overview of the key points many folks seem to be getting wrong:
• The Crisis was a confluence of rare events, a “Perfect Storm”: To the contrary, the crisis was inevitable. It was the end result of too much liquidity, bad central banking, special legislation, regulatory exemptions, too much risk, misaligned compensation systems, regulatory capture, and a unwavering belief that markets are efficient and humans are rational.
• Lehman should have been saved: This was not a yes/no decision. The best option would have been a more Bear Stearns approach (w/o the Fed $29B) — a prepackaged, orderly bankruptcy sale/liquidation.
• Regulation was the cause of the collapse: It was not regulation, but specific exemptions from regulation that allowed bankers to run wild. Glass Steagall repeal, CFMA, Net Cap exemptions, ignoring the lack of non-bank lending standards, excess stock option comp, all contributed to the collapse.
• Lehman’s collapse us what killed AIG: The same riptide that drowned Lehman also swept AIG out to sea: Too much leverage, too much exposure to subprime loans, too many derivatives, too little risk management, with costs borne by shareholders and taxpayers. A classic correlation/causation error.
• Housing’s special status caused the collapse: Housing has long had a special status in America. But the mortgage interest rate deduction has been around for a century. It did not cause the collapse — the abdication of lending standards is at the heart of this crisis.
That’s 5 of the big ones; there are obviously many more.
A greatly expanded version of this list is in Bailout Nation . . .