There will come a moment when the most urgent threats posed by the credit crisis have eased and the larger task before us will be to chart a direction for the economic steps ahead. This will be a dangerous moment. Behind the debates over future policy is a debate over history—a debate over the causes of our current situation. The battle for the past will determine the battle for the present. So it’s crucial to get the history straight.
What were the critical decisions that led to the crisis? Mistakes were made at every fork in the road—we had what engineers call a “system failure,” when not a single decision but a cascade of decisions produce a tragic result. Let’s look at five key moments.
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2 comments:
One problem to rule them all: minimum capital requirements. The reality is that whatever screw ups might have happened in the market, all of it was made infinitely worse by the amount of leverage that had been built up in the system. So the simply solution is that any debt based investment vehicle needs to have capital requirements.
CDO's and CDS's are not inherently dangerous things, but they are without proper capital to back them. Without real money to back any of these investments, when a few bad things happened, the whole thing came apart at the seams.
Recessions are a natural and healthy, if painful, part of life. We need them to clean out the bad ideas. But what makes a recession turn into a bad recession or a depression is largely driven by the amount of leverage in the system.
Would it be possible that the single, if only one thing could be picked, most destructive move was the erosion of the acts that FDR put in place? The leveraging and the SEC chairman using a hands off approach instead of doing his job.
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