All of these papers suggest that the search for a villain behind the crisis will ultimately be fruitless. There are two basic narratives of what happened. The first is that bankers had bad incentives: they took massive risks because the profits were so good in the up years that it was worth the risk of the bad, or because they could pass the risks onto some other sucker, or they thought Uncle Sugar would bail them out. The other narrative is that bankers had bad information: they didn't understand the risks they were taking.
I've always preferred narrative B, because Narrative A doesn't make much sense. The CEOs of big banks lost vast sums of money, and their jobs, most of their social status, and so forth. They held onto the worst tranches of their securities, which implies they didn't know how badly they were going to blow up. Etc.
I find it vastly more plausible, if not so comforting, to believe that systems can occasionally produce bad results even if the incentives basically point in the right direction. The FICO score revolution was valuable, but we took it too far. The money sloshing around US markets disguised the problems, because people who got into trouble tapped their home equity, or in a pinch, sold the house at a tidy profit. Everyone from borrowers to regulators was getting the same bad signal, that their behavior was much less risky than it actually was.
That doesn't mean that nothing can be done. Maybe we decide we want a less complex financial system. But it won't be because there's some villain manipulating everything into ruin; rather, we may decide that there are certain kinds of risks we can trust ourselves to handle.
I'm not sure that this would work, and I'm skeptical that it's a good idea. But the more time we waste trying to figure out who did us wrong, the less quickly we will arrive at an actual solution.Problem Identified: The System
Basis For Claim: Gut Feeling
Causes Of Problem: Unknowable
Solution For Problem: Solve problem without figuring out what went wrong.
It is absolutely incredible that Megan McArdle can be splashed all over tv, radio, and internet peddling a book that directly contradicts her earlier work. McArdle is being presented as a brilliant economist/journalist/Big Thinker, her book praised and welcomed and feted, called innovative, illuminating, humble, intelligent, "gracefully written, carefully researched," vibrant, seminal, and wise. But when the financial system collapsed under the weight of its own greed and graft McArdle leaped to its rescue, telling us nobody could know anything ever and there are no villains and CEO compensation shouldn't be cut. For systemic reasons.
Failure also, however, tells us exactly what went wrong. Ms. McArdle said, "Failure tells us exactly what doesn't work" and "Failure tells us more than success because success is usually a matter of a whole system." Now that she is selling a book on failure, she tells a different story.
God bless America, where income and social mobility are so easily achieved. All you have to do is be born to wealth and then latch onto a billionaire like a remora, spending the rest of your life sucking up the crumbs that fall from his mouth.
This is why I keep taking mental vacations. It is as stomach-churning as it is sad.