I had a 7 hour drive today back to the city so I was ready for the podcast firehose. I read about this paper this morning and experimented with some text-to-speech software and managed to listen to the whole paper in the car. Fun!
Anyway, I was hoping for more of an upshot than this:
There are several observations to be made from the number and variety of narratives that the authors in this review have proffered. The most obvious is that there is still significant disagreement as to what the underlying causes of the crisis were, and even less agreement as to what to do about it. But what may be more disconcerting for most economists is the fact that we can’t even agree on all the facts. Did CEOs take too much risk, or were they acting as they were incentivized to act? Was there too much leverage in the system? Did regulators do their jobs or was forbearance a significant factor? Was the Fed’s low interest-rate policy responsible for the housing bubble, or did other factors cause housing prices to skyrocket? Was liquidity the issue with respect to the run on the repo market, or was it more of a solvency issue among a handful of “problem” banks?
Apparently we still don’t know what the problem was, though leverage, regulatory capture/incompetence and ‘global imbalances’ show up a lot. Screaming for some mention is my favorite explanation, which is a Cowen-Sumner synthesis: we weren’t as rich as we thought we were and that realization was more painful than it should have been because the fed screwed up and continues to screw up. The rest is a bunch of banks that should have gone bust.
Lo goes on to finish the paper with a discussion of how economics is basically an irretrievably inexact science (ie we may never Know The Answer) and then, oddly, goes on to do a bit of primary journalistic research, suggesting some rule change by the SEC didn’t actually open the gate for increased leverage in 2004, contrary to many claims.
The real take-away for me is that the best academic and journalist books, respectively, on the crisis are “This Time It’s Different” and “Too Big to Fail“. I’ve read the second and will some day read the first, I think.
I’ve had just about enough financial crisis porn for a little while, though.