Deconstructing the “Crisis”

Economist Alan Blinder posted a good op-ed in Saturday’s New York Times (registration may be required).  In the piece he stresses the importance of identifying policy mistakes that have brought the economy to this point.  He infers that virtually all the mistakes relate to loose regulation or poor administration.  Blinder lists six: 1) lack of derivatives regulation, 2) excessive balance sheet leverage, 3) growth of subprime lending, 4) failure to stem foreclosures, 5) letting Lehman fail, and 6) mismanagement of TARP.  While this explanation is certainly in the spirit of the times, I don’t think it accurately represents the complexity of the mistakes which have been made.  I think a closer examination, too, will show that many of the mistakes were the result of bad or excessive regulation, not lack of regulation (more on this in future posts). To give but one example, you cannot divorce the growth of subprime lending from the CRA (Community Reinvestment Act), which acted as an important catalyst in lowering lending standards.  However, Blinder makes an excellent point — if we’re going to restore integrity and faith in the financial system, we better understand the root causes of our system’s failure.

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