We detect a theme emerging from the commentary on the financial crisis. The real source of the problem: Too much debt, period.
Sebastian Mallaby, drawing on Columbia’s Charles Calomiris, in today’s Washington Post column, “Blaming Deregulation“:
So the first cause of the crisis lies with the Fed, not with deregulation. If too much money was lent and borrowed, it was because Chinese savings made capital cheap and the Fed was not aggressive enough in hiking interest rates to counteract that. Moreover, the Fed’s track record of cutting interest rates to clear up previous bubbles had created a seductive one-way bet. Financial engineers built huge mountains of debt partly because they expected to profit in good times — and then be rescued by the Fed when they got into trouble.
Of course, the financiers did create those piles of debt, and they certainly deserve some blame for today’s crisis. But was the financiers’ miscalculation caused by deregulation? Not really.
The “too much debt” analysis was also the bottom line for a very good explanative show on the financial crisis on NPR’s “This American Life” broadcast over the weekend. Good radio, really.
365: Another Frightening Show About the Economy
Alex Blumberg and NPR’s Adam Davidson—the two guys who reported our Giant Pool of Money episode—are back, in collaboration with the Planet Money podcast. They’ll explain what happened this week, including what regulators could’ve done to prevent this financial crisis from happening in the first place. You can learn more about the daily ins and outs on the Planet Money blog.
Featured is the first comprehensible description we’ve heard of credit-default swaps.
In other WaPo news, media critic Howard Kurtz covers the possibility that perhaps the media were insufficiently attentive to the potential of there conceivably being a problem, maybe.
Beyond Wall Street, what about Washington? Most news organizations fell short in reporting on the lax federal regulation that everyone — even the Bush administration — now admits was at the root of the problem.
Everyone admits? Reconcile that with Mallaby’s observations. (And for the sake of exercise, let’s find out how much Fannie and Freddie advertised in the newspapers.)
In any case, the most striking mistake in the lust for deregulation was clearly introduction of interstate banking.
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