Rick made some important points about some of the causes of the current crisis. As important (or maybe more so, given our political economy) is to outline what didn't cause the crisis:
1) Greed. As Larry White says,
blaming greed for the crisis is like blaming gravity for a plane
crash. It doesn't help at all as an explanation- it's a constant.
Sure greed was present, but it had always been present in the market
for homes and related securities, without such a problem. Greed is
also present in the market for treasury bonds, chocolate, and bicycles-
where are the crises stemming from these markets?
2) De-regulation. Housing and banking are two of the most heavily regulated sectors of our economy. As Robert Merton points out, banks are regulated by virtually every level of government. Regulation in these areas has only increased the resources put towards gaming the system. Barney Frank is never going to out smart the rocket scientist turned investment banker. The huge profits made in these sectors recently, came because regulators encouraged risks that put more people in homes and insulated the players from these risks (e.g. the governmentimplicit
explicit backing of the housing GSEs). If too little regulation caused
this crisis, we should think that our next crisis is more likely to be
in the automotive repair industry than in health care.
3) Securitization. I can buy a security that will entitle me to a part of the cash flow from a specific airline route. Where's the crisis stemming from this security? Further, while securitization is recent in the mortgage market, we've been able to buy securities based on the future profits of companies (i.e. equities) without causing a crisis for many, many years. Securitization of mortgages was a great idea and (peculiarities of the market not withstanding) it surely has (and will, barring any new regulation) help increase the gains from trade in the market for homes by increasing the liquidity in the market.
1-3 were all present, to varying extents, but correlation does not imply causation. Identification issues abound, but we must look beyond these three variables that were either unchanged across time in the housing/banking industry or were constant across industries during the period running up to the crisis. We can only hope that after the campaign is over, those who think they are "running our country" will sit down and seriously think about why the incentives in the housing market led to disaster.
2) De-regulation. Housing and banking are two of the most heavily regulated sectors of our economy. As Robert Merton points out, banks are regulated by virtually every level of government. Regulation in these areas has only increased the resources put towards gaming the system. Barney Frank is never going to out smart the rocket scientist turned investment banker. The huge profits made in these sectors recently, came because regulators encouraged risks that put more people in homes and insulated the players from these risks (e.g. the government
3) Securitization. I can buy a security that will entitle me to a part of the cash flow from a specific airline route. Where's the crisis stemming from this security? Further, while securitization is recent in the mortgage market, we've been able to buy securities based on the future profits of companies (i.e. equities) without causing a crisis for many, many years. Securitization of mortgages was a great idea and (peculiarities of the market not withstanding) it surely has (and will, barring any new regulation) help increase the gains from trade in the market for homes by increasing the liquidity in the market.
1-3 were all present, to varying extents, but correlation does not imply causation. Identification issues abound, but we must look beyond these three variables that were either unchanged across time in the housing/banking industry or were constant across industries during the period running up to the crisis. We can only hope that after the campaign is over, those who think they are "running our country" will sit down and seriously think about why the incentives in the housing market led to disaster.
