Is the Need for Simple Stories Getting in the Way of Banking Reform?

Let’s acknowledge the obvious: there are a lot of not trivial impediments to reining in the banking industry: the deregulation policies that put a comparatively small number of firms in charge of infrastructure critical to commerce; the fact that said firms have done a very good job at disguising the rents they collect; that those rents have now become so high as to allow the financial services industry to pay for a sizable lobbying effort to keep those favorable rules in place.

So any reform effort is up against very well heeled, very well placed incumbents. That makes it imperative that the case against its bad practices be compelling.

But are opponents doing themselves a disservice by demanding simple narratives as the way to rally opposition? Unfortunately, that’s a well documented human way of organizing information. Studies of jury decision-making have found that they do not proceed by weighing evidence, but by storytelling: to see what account of events they find most plausible.

An by Moe Tkacik in the Baffler, based on a reading of thirteen (!) crisis books, highlights this issue (Completely self serving aside: I am in the peculiar position of , which by virtue of it being of the ones NOT put on line, appears to have been read by all of one person not associated with The Baffler, namely Felix Salmon, who was a good enough sport to say he enjoyed it throughly. This puts me in the odd position of having more people in my Long Suffering Circle of PrePublication Sanity Checkers having seen it than actual target readers).

This part of Tkacik’s essay caught my attention:

The above paragraph is excerpted from one of the most widely read texts to emerge from the financial crisis: the October 2008 farewell letter of a hedge fund manager named Andrew Lahde. The letter opens, “Dear Investor,” and closes with the words “goodbye and good luck”; in the fifteen months prior to authoring it Lahde hadamassed a 1000 percent profit for his clients and increased his own net worth nearly a hundredfold by anticipating the foreclosure crisis.

The letter depicts Lahde’s success as a victory over a class of people variously termed the “Aristocracy,” “the low hanging fruit,” the “idiots whose parents paid for prep school, Yale, and then the Harvard MBA,” who “were (often) truly not worthy of the education they received (or supposedly received)” but rose to the commanding heights anyway because they “had all the advantages (rich parents) that I did not.” Condemning politicians for repeatedly rejecting legislation that “would have reigned [sic] in the predatory lending practices” and bemoaning “a dearth of worthy philosophers in this country,” the letter challenged George Soros and other great minds to convene a meeting to devise a new form of government devoted to fostering a genuine meritocracy. “Capitalism worked for two hundred years, but times change, and systems become corrupt,” Lahde wrote….

Like Lahde, [federal judge Richard] Posner is pessimistic about the nation’s financial future, and he blames the coming full-scale “depression” upon a neglectful regulatory structure and an academy that had been “asleep at the switch.” The chief difference between the two seems to be their esteem for other capitalists. Where Lahde saw a financial industry peopled with mediocre trust fund kids who had traded their souls for Crackberries and Wellbutrin, Posner defends bankers “whose IQs exceed my own” as “brilliant.”….

..the rationally self-interested John Galt clones who seem to inform Judge Posner’s views are decidedly less believable characters than the rich-kid conformists Lahde indicts. And in a way, Lahde’s mixture of sympathy and contempt for his fellow financiers bodes better for the future of the American economy than does Posner’s soft bigotry of subprime moral standards. This is not an ancillary concern. If capitalism has failed, and socialism has failed, and the only remaining option is some improved version of the drab “mixed economy” that currently exists, then we are living in a perilous ideological vacuum.

Yves here. In particular, Tkacik notes that Posner calls for:

….a concise, constructive, jargon and acronym-free, nontechnical, unsensational, light-on-anecdote, analytical examination of the major facts of the biggest U.S. economic disaster in my lifetime….

I think a lot of people would like to see that too. And the very desire for something that simple is a huge impediment to reform.

Of all the things Posner asked for, the red herring is “non-technical”. I submit it is not possible to have an adequate description of the crisis without digging into, exposing, and explaining matters that ARE technical. Now that can probably be broken down in a way to make it accessible to laypeople but it will require a willingness to learn a bit.

Let us put it another way: Would ANYONE with an operating brain cell have demanded a “nontechnical” explanation of the Challenger disaster? Rocket failures are actually not uncommon, but even though the terrain and the forensic methods were presumably familiar, no one would expect the investigation NOT to be technical. It had to have been a materials, mechanical, electronic, programming, or human failure (or a combination of the above). Investigators had to look at how the flight came apart to determine the precise nature of the failure.

The disaster that befell the global economy took place in a vastly more complex, less well charted system. Moreover, most people accept that looting took place, they just don’t know how, exactly (and they may not be able to articulate it as looting, but they get that big bonuses and big bailouts should not co-exist). How can probing the looting mechanisms NOT be a critical step? And that by nature IS going to be a technically-oriented exercise.

Moreover, the attempt to reduce complex phenomena to simple accounts can be misleading, even counter-productive. The Depression took place eighty years ago, and economists and financial historians are still debating its causes and what remedies were effective. What is disconcerting is that the dominant narratives seek to attribute the depth of the downturn and the halting progress out of it to either poor monetary policy or poor and later inconsistent fiscal policy (most people forget that there was a steep recovery before the second leg downwards in 1937, when fiscal stimulus was withdrawn).

But single factor explanations of complex phenomenon are dubious. That period also included considerable financial reform (deposit insurance, the securities laws of 1933 and 1934), and both debt destruction via default and bankruptcy, as well as via restructuring, the Home Owners Loan Corporation, which refunded mortgages that had been five year bullets (not sure how much principal amortization, but there was still a large balance after five years) into twenty to twenty-five year fixed rate. It should be noted that even though the HOLC was seen as a risky gimmick at the time, the maturity matching was a much better fit than the old loans, which were of much shorter maturity than typical ownership, and the five year bullet simply created considerable rollover risk. Perversely, now with society more mobile (both physically and materially) and with homeowners refinancing more often, we have a maturity mis-match the other way, with fifteen to thirty year mortgages when relatively few people occupy the same house long enough to pay their mortgages off (and let us not forget that transaction costs are high….).

So the desire for simple narratives has likely clouded our understanding of the Great Depression. It may be that a whole series of elements are necessary but not sufficient individually for a sustained recovery to take place. Or there may be a significant “time heals all wounds” component: that a certain amount of debt writeoff/restructuring needs to take place for other interventions to have sustained impact.

Humans find abstractions and models useful in separating noise out from underlying, durable relationship. But the desire to find patterns can lead observers to see ones where the support is tenuous, or focus on some at the expense of others which may be just as valid. I hope enough of the people seeking to understand the crisis avoid falling for seductive, but potentially incomplete, explanations.

Update 7:30 PM. I see in comments that a lot of readers are unhappy with the notion that Posner’s and most people’s desire for a “….a concise, constructive, jargon and acronym-free, nontechnical, unsensational, light-on-anecdote, analytical examination of the major facts of the biggest U.S. economic disaster in my lifetime….” might actually impede reform efforts. I probably erred in focusing on “nontechnical” in my discussion. Upon further reflection, the real issue with his (and most people’s desire) is wanting both “concise” and “nontechnical”.

In my view, the investigations of the crisis have not deleved sufficiently into the complex products, the related trading strategies, and the profit/bonus determination methods related to them. That is where the looting took place. Until someone goes there, no account will be sufficient, and the odds remain high that the mechanisms by which the chicanery took place will remain intact.

Paul Volcker correctly dismisses what the industry has touted as “innovation” as unproductive on balance, but they still remain free to “innovate”. Volcker’s skepticism, no matter how well founded, is not backed by a compelling indictment.

Now when the forensic work has been done, the process by which the looting occurred probably can be broken down in a nontechnical form. But it will not be concise, and it is unlikely to be a simple narrative. That is where my beef lies.

For instance, UBS was forced by its regulators to explain why it got itself in a mess. They provided a detailed report to the regulators, and a shorter, more accessible one to the public in the form of a shareholder report. It runs to a full 50 pages. And even then, it is FULL of acronyms, so getting those out would make it even longer.

I also note that some readers jumped on the Challenger example, saying, “Oh, but it was a simple explanation! It was the O-rings! And that can be explained in a non-technical manner.”

Reader John L reminds us, by e-mail, that the O-rings were the proximate cause of the rocket blowing up, but there were NOT the real reason the astronauts died. The real cause was compromised design that resulted from the choice to have a reusable shuttle. He contends that if a similar explosion had happened in an Apollo rocket, the crew would have survived:

The idea of a re-useable space shuttle is one only a contractor could come up with. Its retarded, but it looks cool, and costs a lot.

Rockets blow up. When a rocket is performing correctly is blows up under the rocket. When one of a billion things go wrong, the oxidation of the fuel no longer takes place where it should, under the rocket.

Because of this there are a few very simple things that can be done to protect the payload. One of them is to put the payload as far from where the explosion is supposed to happen, on top You still have to harden that payload, but putting it on top of the rocket will lessen the chances that something goes wrong and fries the payload. If the fuel oxidizes by accident early, there is also less cross sectional area facing the payload. I can hit you with a broom stick, or jab you with it (which do you think might be easier for me?)

Put the passengers next to the fuel, and you are going to have problems. So, you have to harden the compartment that they are housed in. Its too expensive (and too heavy) to harden the entire re-usable ship, so you focus your effort on the cabin. This leads to the falling tin can with a windshield if something goes wrong.

The Apollo rockets all had the ability to bail out the crew, for the reasons above. An explosion would force the passenger cabin up and away from the rest of the explosion, and then a built in parachute could deploy and return the capule to the earth safely.

There was no way to build a parachute into the shuttle, It would have been blown up by the explosion next to and around the passenger cabin.

You end up rebuilding the rocket each time anyway, through inspection or parts replacement. You aren’t really reusing anything, you are just forcing all of the contractors to work on top of each other, and to all have to come to one place. Modular construction is the way to go, the shuttle program proves it.

The lobby is just like the banks though. They know that the end of the shuttle means no more govt money. They have been fighting the redesign all along. Just like the banks.

So who does the incomplete but compelling O-ring story, with its focus on proximate, rather than underlying causes, favor? The shuttle contractors, who get to continue with an initiative that is not as advantageous from a cost standpoint as they would have us believe, and puts the crew at more risk than older, safer designs. But some readers maintain this example bears no resemblance to the crisis.

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66 comments

  1. Moreover, I am of the view that the attempt to reduce complex phenomena to simple accounts is counter-productive. The Depression took place eighty years ago, and economists and financial historians are still debating its causes and what remedies were effective.

    I think the reason economists and financial historians need to conjure up a phony debate is because they all agree that fincnacialization must continue at all costs. (And of course their own paychecks depend upon the existence of a bloated finance sector.)

    Those of us who don’t recognize the need for all this, the whole structure of financialization and its adjuncts like mercenary academia, to exist at all; who on the contrary recognize that human society would be much better off without all that, find it easier to see the simple, clear truth.

    This truth is the clear story of capitalism’s structural contradiction, its inherent tendency toward stagnation, how it has far outrun any real productive base, how it must find ever more artificial ways to jolt its Frankenstein’s monster of “growth” into zombie ambulation, and how all this has combined with the human-all-too-human elements of greed and materialism to construct a system doomed to fail, over and over again, with the failures following harder and harder upon one another, while ever greater masses of the people are economically liquidated, until the final collapse.

    But since even most people who subjectively deplore the destruction of the real economy, the hijacking of democracy, and the fact that we now live under the tyranny of a few protection rackets, still objectively are committed to the chimera of exponential growth capitalism, they refuse to see the simple, overarching truth.

    And when they commit themselves instead to anodyne “reform” which has been proven not to work where these rackets exist, they’re simply spinning their wheels in the mire of their own doublethink.

    If capitalism has failed, and socialism has failed, and the only remaining option is some improved version of the drab “mixed economy” that currently exists, then we are living in a perilous ideological vacuum.

    We should be clear that socialism has never “failed” because it’s never been tried except as small, localized experiments. The failure of any of these experiments occurred in the face of overwhelming hosility of their surroundings, often violent hostility. That can hardly be cited as evidence that the idea is fundamentally unsound.

    Industrial communism is of course not synonymous with “socialism”, a vast concept. Industrial communism is just another version of state capitalism. Lenin himself called it such.

    In the end all industrialism, all modern mass societies, are varying forms of national socialism. The only variation is the ratio of the “nationalism” to the “socialism”. But it’s all industrial corporatism.

    So that’s where we are ideologically. All “ideology” has been put on ice by the homogeneous stultification of globalized corporatism, which is a mechanical, soul-dead process and not a vision for humanity.

    1. Moopheus

      “We should be clear that socialism has never “failed” because it’s never been tried except as small, localized experiments. The failure of any of these experiments occurred in the face of overwhelming hosility of their surroundings, often violent hostility. That can hardly be cited as evidence that the idea is fundamentally unsound.”

      No, when experiments fail, you do have to question whether the fundamental idea is sound. That’s why you do experiments. Free-market types like to make exactly the same arguments about their own ideologies, and it is just as delusional. Now, you could say that and experiment failed because of poor experimental design, but in the case of tests of ideology, the ideology is the experimental design. If the experiments failed because the systems were not sufficiently robust to withstand the conditions under which they needed to survive, then the ideology needs to be revised. Also, you need to realize that any system we build will eventually fail. It’s in the nature of systems; they break. If you want to survive the system failure, you have to understand how the system can fail and plan for it to happen.

      1. If a mob takes a crowbar to the apparatus when the experimental effect is still nascent and weak, then you certainly haven’t conducted a test of it running at full power.

        Market fundamentalism, rigged corporatism, on the other hand, has had exhaustive real world testing and has been empirically proven to fail at everything it ever claimed it would do – create permanent living wage jobs, create such technological marvels that we’d all be living lives of leisure, distribute wealth widely and fairly, give us peace, security (most of all the feeling of security) and prosperity….

        They had decades of full freedom and created none of these; in every case the opposite. According to their own textbooks their “market” sustained complete market failure across the board.

        Their textbooks always lied, because every word they ever said was a lie.

        As for socialism, it would be nice if man tried it just once to see if it worked.

    2. DownSouth

      Attempter,

      A little off subject, but maybe not because the Tea Party astroturfers seem to masters at reducing complex phenomena to campaign slogan quips.

      This weekend is the convention organized by Tea Party Nation, which seems to capture the ugliest aspect of the Tea Party astroturfers. Here’s their manifesto:

      Skoda announced that candidates seeking backing would need to agree with a list of “first principles” consisting of fiscal responsibility, lower taxes, less government, states’ rights and national security. He said he did not consider those principles a litmus test for candidates.

      So joining the main contenders for the Tea Party brand—the more grassroots Tea Party Patriots and the astroturf and unabashedly Republican Tea Party Express—we now have the Tea Party Nation. The Tea Party Patriots, as well as Rep. Marsha Blackburn of Tennessee and Rep. Michele Bachmann of Minnesota, declined to take part in this Ayn Rand orgy of xenophobia, racism and bashing of poor people.

      The three videos give considerable insight into the Tea Party Movement.

      1. Skippy

        DownSouth why use the jackboot when your neighbor is even better and will pony up the running costs. We have seen this all before…eh.

        Skippy…Every time I hear her name, I visualize the nurse in the movie “High Anxiety” by Mel Brooks, her followers are kinky…methinks. Closet vinyl types with a penchant for being dominated….by Auntie lol.

      2. My favorite part is how they organized it as a for-profit corporation. Now that’s idealism you can believe in.

        No astroturfing there.

        (It’s also a moron test for anyone contemplating giving money to it.)

        I also like how they settled as policy that they won’t be running third-party candidates.

        Now that’s what I call independence of the Republicans.

        No astroturfing there.

  2. Mark Pawelek

    “But single factor explanations of complex phenomenon are dubious.”

    This is were your essay falls down. Complex systems may often fail for a simple reason. Yes, the system may have a particular configuration in place but that doesn’t mean that the failure is due to complex processes. It isn’t the final straw that breaks the camel’s back – it’s the weight of all the previous ones. Steve Keen’s google videos give the best explanation I’ve seen.

    1. Dan B

      Good comment. Complexity require energy to sustain and maintain it; and more complexity needs more energy and reaches a point where returns are marginal in relation to energy expended.

      We could posit that the decline in the availability of cheap, versatile, high quality energy -peak crude oil- is the distal cause of the contraction of the economy. OIl peaked in the US in 1970; we’ve been trying through social policy to avoid this reckoning since then. Cutting loose industry for the FIRE economy has not worked. Now, as the world enters the post-peak oil era, the central issues is “when do we realize that we can no longer borrow and create debt base on the assumption that the world will be wealthier in a few yeas than it is now?” The financial houses should have been allowed to fail -this was the ultimate market and ecological signal of the need for creative destruction.

      1. dlr

        Post-peak oil? Are you dreaming? Oil is selling at 70 dollars a barrel, and most probably is on its way down, both short term AND long term. Short term, because of the global recession, but long term because of ever improving energy technology. ‘Peak oil’ is not going to occur in our life-times, or in the life-times of our children. Long before we run out of oil we can pump out of the ground, it will be being mass produced by bio-engineered bacteria, or any one of a dozen other ways.

        Human ingenuity trumps resource depletion. Over, and over, and over again. One of the great narratives of the last 10,000 years.

  3. kevin de bruxelles

    Just to get this out of the way, the question of the manner of telling the bank reform story does imply a functioning political market place of ideas. Although many could justifiably question whether such a market place does exist in America, let’s suppose it does.

    In this case there is no contradiction between designing bank reforms and telling simple stories. That is because they are two entirely separate activities, just as design and marketing functions are separated in most organizations. To successfully design an effective and robust banking reform plan takes a motivated team of the most knowledgeable experts in the obscure arts of international securitization and finance. Much like architects designing a complex building, any reform program must be bases on intelligible principles and have a unity of design that allows future flexibility since once the plan hits the real world, clever bankers will be trying to game it. Only a team of experts, which includes generalists able to keep a team on concept, can achieve this.

    But the task of SELLING the plan in the political marketplace is completely different from designing. For this we need to look at a famous quote from the godfather of Neo-Conservatism, Irving Kristol:

    There are different kinds of truths for different kinds of people. There are truths appropriate for children; truths that are appropriate for students; truths that are appropriate for educated adults; and truths that are appropriate for highly educated adults, and the notion that there should be one set of truths available to everyone is a modern democratic fallacy. It doesn’t work

    Since technical skills and selling skills are rarely found in the same person, the task of marketing the proposal normally involves a totally different team of experts, this time in the dark arts of persuasion. The only exception would be in marketing to the highly educated adults which probably would be better accomplished by technical experts. But for all the other levels of educational achievement that Kristol mentions, true marketing expertise is needed. This does not mean these bank reform salespeople must necessarily lie (although their opponents surely will). But they must wage and win the battle of what I call the circle of inclusion.

    People naturally divide their world into “us” and “them”. The “us” includes people within one’s circle of inclusion; the “them” are obviously outside. The goal of a politician is to place himself within his target audience’s circle of inclusion and/or place his opponent outside. The most obvious examples of this in US politics involves race. In 1988, most Americans would place poor ghetto blacks outside their circle of inclusion which is why Bush I worked so hard to place Willie Horton within Dukakis’ circle. Bill Clinton in 1992 wanted to pre-empt this move and therefore he needed his Sister Souljah moment. Bush II in 2000, recognizing that most Americans now included middle class blacks in their circle of inclusion but excluded obvious racists, wanted to offset the perceived notion that Republicans were racist by including prominent Blacks (Powell and Rice) in his campaign.

    Not that I am any good at selling but an obvious circle of inclusion bank reform strategy might be to define opponents of bank reform as Wall Street puppets. Given America’s let’s say, rather complicated political landscape, it will never be as simple as that of course.

    So as any bank reform plan is being designed, the battle of ideas and slogans within the political market place (excepting the highly educated) will need to be waged by experts in political marketing and indeed in telling simple stories, because one thing is sure; the opponents of bank reform most certainly will be deploying these same weapons in full force. And let’s be clear, it is possible for a bad reform plan to be successfully marketed, and vice versa. There is a large degree of independence between the two efforts.

    1. DownSouth

      kevin de bruxelles,

      Yours is RULE TWO in Daniel Yankelovich’s “Ten Rules for Resolution” that he presents in Coming to Public Judgment: Making Democracy Work in a Complex World:

      RULE TWO: Do not depend on experts to present issues.

      As specialization has grown, so has the use of jargon and technical terms. These semiprivate languages serve many purposes; a principal one is a gatekeeper function. No force is more powerful in maintaining the distinction between insiders and outsiders: if you do not speak the lingo, you are automatically an outsider, which thereby safeguards the structure from invasion by outsiders and preserves it for insiders.

      So deeply rooted is this tendency and so unconscious, that even when experts genuinely wish to include the public, their language, tone of voice, and distinctive framework distance them from the mass of people.

      Also you say “People naturally divide their world into ‘us’ and ‘them’. The ‘us’ includes people within one’s circle of inclusion; the ‘them’ are obviously outside. The goal of a politician is to place himself within his target audience’s circle of inclusion and/or place his opponent outside.” So what do you say about somebody like Obama, who evidently believes the “us” category can be extended to include everybody?

      1. DownSouth

        Your invoking Kristol shows that conservatives know how to market, but progressives don’t.

        The question we must ask ourselves of Democatic politicians is this: Is this a bug, or a deliberate design feature?

      2. craazyman

        Rule Two applies to nearly everything except: 1) being an NFL quaterback, 2) running a nuclear power plant and 3)fixing a clogged toilet.

        South, you’re going to give yourself a brain hemmorage or a hemarroid reading all those expert books about history and culture.

        I hope you get out once and while and blast down 9 or 10 Tecates with the senioritas. I swear to God some of them look like footballs with arms and legs, but there’s a fair share of hot ones too.

        1. DownSouth

          The NFL has all sorts of rules and regulations to prevent a quarterback from having a financial interest which might cause him to throw a game, that is to lose a game on purpose.

          An NFL quarterback’s expert knowledge of football is not necessary to explain why such rules are necessary. (Nor, for that matter, would he be the appropriate person to ask whether he should be subject to such regulations.)

          And yet, politicians tell us, and with a straight face, that their ability to carry the ball for the American people is not impacted by the hundreds of millions of dollars they receive from the financial sector.

          Daniel Yankelovich spent a lifetime in public opinion polling and marketing. I take it he knows something about which he speaks, and that there are some basic rules to opinion polling and the marketing of ideas that just about any freshman marketing student would learn.

          Don’t you find it strange that our “tribunes of the people,” politicians like Obama, seem to be master marketers when they are campaigning for office, but once installed in office can’t sell dollar bills for 50 cents? Strange too it is that the patricians’ quarterbacks don’t seem to be so afflicted.

          Do you really believe one must have expert knowledge to know what needs be done with quarterbacks who can’t win football games, with nuclear power plant operators who run power plants like Chernobyl, or with plumberd who can’t unclog toilets?

          1. craazyman

            Shit. I agree with you. I meant to “be” one, not to go to meetings and talk about it, like a soft fart. Can you imagine having 2000 pounds of man killing muscle chasing you down in tenth of a second intervals? Shit. That’s real time. Gotta love ’em though. Drew Brees is only 6 feet tall. I hope the ‘Skins keep Jason Campbell. He’s better than their record.

  4. craazyman

    Holy Shit. Let’s see if we can coax Mr. Lahde out of retirement to grace us with a stock tip for today, I’d settle for a 50 bagger, but a hundred bagger would be oK too. Sounds like his messiah complex is prowling the perimeter of his private circle of awareness looking for ascendancy without the crucifixion. Stories. ha ha ha ha. Here’s the story. Man puts big feathers on his head and dances around fire making guttural noises. Then shoots another man with bow and arrow, praying to some animal with sharp teeth. Takes other man’s teepee, now that he’s dead he won’t need it. Head feathers shine in milky moonlight while north wind blows. 1 death is a tragedy but 10,000 is a statistic. -Uncle Joe Stalin

  5. walter_map

    Great. The problem has become so large and complex that it cannot be understood. So much so that even speculative representations are of little avail in getting any clear and detailed picture of the problem, much less in arriving at a workable solution.

    It serves the purposes of the greedy to make the problem intractably large and complex so as to preclude the possibility of accurate analysis and, in turn, prevents any solution based on that analysis. Which is no doubt precisely why they have made the problem so large and complex.

    Look at it this way. You’re effectively playing a game of chess where your opponent has made the board arbitrarily large and has modified the rules to allow himself to rewrite the rules according to his caprice. How can you win? You can’t, not under these circumstances. Chess is complicated enough with 64 squares and conventional rules.

    As usual, the solution is suggested by the statement of the problem: Is the Need for Simple Stories Getting in the Way of Banking Reform? The answer is No: as the question itself states, there is a Need for Simple Stories. If you need Less-Than-Simple Stories you’re playing the Wrong Game. You’re playing into the hands of your opponent.

    Your logical course is to simplify the problem with a series of steps, in the following order:

    (1) End political capture and regulatory capture. If you cannot do that, nothing else will help you. Guaranteed.
    (2) Nationalize the biggest banks and replace the existing management.
    (3) Break up the big banks so that none are too large to fail, and none are too large to attempt regulatory recapture. See (1), above.
    (4) Reinstate Glass-Steagal.
    (5) Dismantle the credit derivatives market. Throw it out wholesale if it cannot be disassembled.
    (6) Regulate financial innovations, but enable the patenting of financial innovations with iron-clad time limits.
    (7) Prohibit financial innovations which cannot be effectively regulated or which could conceivably lead to regulatory recapture. See (1), above.

    You wanted a solution, and I’ve given you one. You will say the consequences could be severe, insofar as the banks have promised to crash the system if you try anything.

    But you’re going to have severe consequences anyway, even if you do nothing, so you might as well have something to show for your trouble, and some way to recover from the inevitable catastrophe already staring you in the face.

    You’re welcome.

  6. Tim Coldwell

    David Brin on the same theme:

    Excerpt from: The betrayal of the smart sons

    Consider, if this hypothesis has any validity at all, the profound awfulness of a well-intended betrayal. In these high families, the smarter brothers and sisters want to be part of a lively, enlightenment civilization and to prove they can make it on their own. Today, these brighter siblings vanish into science, the arts, etc, leaving their bonehead bros, who shouldn’t be trusted with a burnt match, holding great power.

    The betrayal of the smart sons

  7. john

    Wow. The Baffler…How’d you end up with a piece in there, Yves?

    Haven’t thought of that magazine since “The Commodification of Dissent” and Steve Albini’s music business rant. Looks like they have some heavy hitters in this issue.

  8. Siggy

    I’m not convinced that there is this need for ‘simple stories’. I am convinced that there is a lot of noise that is not answering simple and direct questions. I am convinced that there are people who have vested interests and self serving agendas.

    My perception is that it is not so much the need for simple stories that is impairing the dialogue, it is this presumption that there is an easy and painless solution. The bottom line for the resolution of the current crisis is that we shall all be poorer when the credit markets are finally stabilized.

    Walter’s road map appears overly simple; yet it does appeal to me. What it does not address is the very real need to prosecute the financial fraud that has been perpetrated. Absent prosecutions we will have another financial crisis and will have failed in our moral obligation to our self.

    NBER may well report that this recession ended in July or August of 2009. I will believe that when the 8 million jobs that have been lost have been recovered. To the extent that we insist on attempting to borrow our way to prosperity we are chasing a rainbow that has no end.

    One must wonder why is it that governments are so universal in their willingness to replace decreased consumer demand with the expenditure of what must be either tax revenues or the debasement of the currency. Being a part of government has become an activity in the exercise of power as opposed to an activity of service.

    Be very clear, the hand maiden of the financial crisis has her home in the government itself. She resides there because we allow her to.

    No, I don’t want simple stories, I want to know how it is that fewer than 20 financial institutions can wield such market power as to bankrupt the nation.

    1. Yves Smith Post author

      Siggy,

      That is a very fair point, but I think the two are being conflated, as in the desire for a simple fix creates the need to have a(n unduly) simple characterization of the problem.

      1. walter_map

        Once you implement my first point

        (1) End political/regulatory capture,

        you’ll get your prosecutions. That follows naturally. And if you don’t implement (1), you’ll get nothing at all. Do you disagree that this is the major impediment to any reform at all?

        Please connect the dots.

        No real criticism has been offered with respect to my proposal, so it stands. No real criticism has been offered for my observation regarding the fact that unnecessary complication of the problem is itself part of the problem. So that stands as well.

        1. Yves Smith Post author

          Walter,

          With all due respect, that’s like saying “end poverty”. You can’t end regulatory political capture without completely changing our campaign financing system and how regulators are paid.

          In other words, to solve a very big problem (undue influence of banking interests) your solution is to take on the entire way we do politics in the US. That is an even bigger nut to crack than just the banking industry. You are now taking on all vested interests, not just the bankers. That has even LESS odds of happening than banking reform, particularly in the wake of the Supreme Court decision re corporate “free speech”.

          Moreover, you missed the point I have mentioned in various posts: a handful of firms control the international debt markets. Those are crucial to modern commerce. They don’t need to lobby. They will be backstopped because they control crucial infrastructure. Until that problem is recognized and addressed, the looting will continue. And prosecutions won’t help, remember, they designed the regs so that the looting was legal.

          And this problem is cross border. The banks are powerful in Europe, which has much less regulatory capture than we do. Look at the stance of Sarkozy and Merkel vs. Obama’s late and half-hearted conversion to the bank critic camp.

          Your comment illustrates my point re single factor explanations perfectly. Your “simple” solution has zero odds of being implemented. That makes it a non-solution. And putting it forward gets in the way of measures that can be implemented and have an impact.

  9. Jim the skeptic

    This is easier to understand than some would wish.

    In 1984 the personal savings rate was 10.8% and by 2005 it was down to .5%, according to the Bureau of Economic Analysis. In 1991 homeowners removed $56.7Billion of equity from their homes and by 2005 they were removing $577Billion in equity, according to the Alan Greenspan and James Kennedy study done in March 2007.

    So after 1984 Americans stopped saving and started borrowing. Coincidently by 1984 American workers were increasingly being forced to compete with illegal immigrants and global free trade and so American wages did not keep up with inflation.

    The American worker is the American consumer so the American economy was bound to crater sooner or later. It was inevitable!

    If American workers/consumers economic health had not been seriously impaired would the financial industry have been able to foist usurious loans on them or been able to sell securities based the lower interest rate mortgages? Would the securities have failed as spectacularly?

    If the Fed had not insured that interest rates stay so low, would savers have invested in the more risky investments? And would that have damaged the investment bankers ability to securitize usurious loans?

    We should be very skeptical of economic models which claim to explain the current economy based on theory rather than the facts.

    So let’s not blame the financial industry for all this. Congress and the executive branch wrote the rules that were bound to crater the economy. Then the congress and the executive promptly bailed out their moneyed constituents converting us to some strange variant of capitalism.

    We need very broad simple laws and then good oversight of a very active regulator. We will get a complicated jumble of laws that allow the regulated to game the system.

    1. john

      > So let’s not blame the financial industry for all this. Congress and the executive branch wrote the rules that were bound to crater the economy.

      I understand the point, but who wrote those rules maybe lobbyists from…the financial industry?

  10. walter_map

    Siggy:

    You say you’re not convinced of a Need For Simple Stories, and yet, the malefactors involved have made the problem large and complex because it serves their purposes to do so. You cannot solve the problem by making it more complex.

    You might like to reread my earlier post.

  11. walter_map

    Jim the skeptic says: This is easier to understand than some would wish.

    Exactly my point as well, Mr. Skeptic. Thank you.

    But do you agree with my other points? Does Yves Smith? And most importantly, does Siggy?

    1. Siggy

      Walter,

      I generally agrre with your posts. I do, however want to emphasis that the absence of prosecution is very much a factor. I also want to emphasize that while there is much reference to complexity, when I examine selected transactions that are labeled as being very opaque and complex, I find that the transaction is really pretty straight forward. For example: A repo is a loan; I give you my securities, you give me money, I stipulate and you agree to ‘sell’ (I repay)the securities back to me at a certain price on a date certain or on demand. It’s a loan. More than anything what matters in that transaction is how it is treated on the balance sheet.

      Now why monkey with the balance sheet? That’s all about leverage, that which is apparent and that which is contingent. So, why do it? To increase the degree of applied leverage. Why do I need increased leverage, to obtain the yield that I require which is a big number because my expected loss in purchasing power is on the order of 3% compounding annually. recognizing that fact, the current yield curve is grossly mispricing the Federal debt. It’s a powerful inducement to assume higher risk, just to maintain purchasing power.

      Now comes Taleb and he says that all the calculus of risk management is BS. There are no black swans.

      What I know as a certainty, you cannot calculate away inherent risk. Create a CMBS and that pool of paper has a certain degree of inherent risk. Resecuritize the money flows attributable to selected tranches of that pool and you are now concentrating risk as opposed to mitigating it. In the typical CDO, the offering sheet says it all. ‘These are income streams attributable to tranches that no else wants to buy’.

      And please don’t tell me that you cannot price this trash paper. Begin with the Guess Model. I guess that the default rate will be 60%, I guess that the loss rate on those defaults will be 50%; or, the loss rate to the total pool will be 30%. Thus, the expected value of the pool is 70%. Now you want me to buy the pool; well, I’ll offer you 35% because I need to get my capital back 100% on my capital. You say my offering price is too low. Do you really believe that I will pay you the profit I expect to make on the transaction? This is not rocket science and a nine year old can do the calculation.

      One of my long standing peeves are realtors. When negotiating a lease they talk about whether the lease is a gross lease, a net lease, a net-net lease or a net-net-net lease. They sound like the police and the army in the Blues Brothers. The reality is that there are three types of leases, a gross lease, an absolute net lease and a semi-net lease. The complexity in that lease negotiation is all about language and the exercise of obfuscation in order to confuse the negotiation.

      The interconnectedness embodied in the ‘repo’ market is indicative of the fact that those players are fundamentally undercapitalized. If the institution is adequately capitalized there is very little need for a repo loan to fund cash requirements. Now if the the rejoinder is that the repo is a hedge against acute change in interest rates, or the slope of the yield curve is changing and we need to hedge or exploit that change; then, I’d say you are speculating. If you are speculating, all well and good; however, the caveat is that every specualtor is entitled to go belly up. It’s their God given right. It is also our God given right to allow the speculator to fail. There never has been a financial institution that that was too big to fail. What has been foisted on the public is the canard that the institution is irreplacable. Just as men are replaceable, so are institutions. Could there be blood in the streets if certain institutions fail quite possibly. But then, what if force majeur is declared and the institution is nationalized, liquidated and resold to new ownership? What then?

      We will never know if the bailouts really avoided a catastrophe. As things stand now, we are faced with a growing potential for catastrophe in the form of the debt we are incuring inorder to avoid catastrophe. All because we have failed to recognize fraud, we have failed to prosecute it. An I will never believe that the principal players in this fiasco did not see the potential for collapse coming. Thier very actions to mitigate the effects of Bear Stearns, Merril Lynch and AIG speak volumes. The fast track to Bank Holding company for GS and MS speak the truth. Why is the Fed so insistent on not revealing the background on the AIG bailout? I rather suspect that the simple story is that there has been malfeasance. Poor judgement we can tolerate, fraud is prosecutable.

      Be very clear in this, when and if this crisis is stabilized, we shall all, in varying degree, be poorer than we were before the crisis. Be very clear that our political contract has been abrogated to the point raising the issue of revolution. In the revolution that is probable, we all need to be very careful in what it is that we wish for.

  12. Francine McKenna

    Judge Posner likes to hear the sound of his own voice. He supposedly seekes explanations in order to shape reform or as you quote him,” ….a concise, constructive, jargon and acronym-free, nontechnical, unsensational, light-on-anecdote, analytical examination of the major facts of the biggest U.S. economic disaster in my lifetime….”

    In fact he is one of the biggest culprits in putting the letter of the law or his desire for a concise, non-technical, approach to it, above a true analytical examination of whether the numerous accounting firms that have come before him have really done their job.

    Judge Richard Posner during oral arguments in Fehribach v. Ernst & Young LLP, 2007 WL 2033734 (7th Cir. 7/17/07) ),
    Posner: Do you think the auditor is supposed to know about market power?… An auditor is not an economic consultant who goes out and figures out what the market trends in an industry are!…Your trends? That’s what the company knows. [Plantiff’s Attorney: You’re right. Here’s what the auditor’s responsibility under SAS 59…]

    Judge Posner’s renowned “pragmatism” gives him cover for his supercilious expressions of frustration and boredom with the exposition of the actual standards by which he should be judging auditors’ performance of their duties.

    Does he want to get an explanation of what happened during the financial crisis? maybe he should let the lawyers explain for him what one of the most critical players, the audit firms that are supposed to be standing as guardians of the public trust, were supposed to be doing rather than thinking it too complicated or vague.

    Posner: That is too vague for me…”

  13. Francine McKenna

    Judge Posner likes to hear the sound of his own voice. He supposedly seeks explanations in order to shape reform or as you quote him,” ….a concise, constructive, jargon and acronym-free, nontechnical, unsensational, light-on-anecdote, analytical examination of the major facts of the biggest U.S. economic disaster in my lifetime….”

    In fact he is one of the biggest culprits in putting the letter of the law or his desire for a concise, non-technical, approach to it, above a true analytical examination of whether the numerous accounting firms that have come before him have really done their job.

    Judge Richard Posner during oral arguments in Fehribach v. Ernst & Young LLP, 2007 WL 2033734 (7th Cir. 7/17/07) ),
    Posner: Do you think the auditor is supposed to know about market power?… An auditor is not an economic consultant who goes out and figures out what the market trends in an industry are!…Your trends? That’s what the company knows. [Plantiff’s Attorney: You’re right. Here’s what the auditor’s responsibility under SAS 59…]
    Posner: That is too vague for me…”

    Judge Posner’s renowned “pragmatism” gives him cover for his supercilious expressions of frustration and boredom with the exposition of the actual standards by which he should be judging auditors’ performance of their duties.

    Does he want to get an explanation of what happened during the financial crisis? maybe he should let the lawyers explain for him what one of the most critical players, the audit firms that are supposed to be standing as guardians of the public trust, were supposed to be doing rather than thinking it too complicated or vague.

  14. eric anderson

    Yves, you speak of looting. Yes, not all of it is easy to clarify. I think it is not so complicated as you imply, though. President Obama himself said it in one of his press conferences. He spoke of institutions making loans to people they knew would not be able to pay it back. That’s a form of fraud. Selling the hot potato loan to the next fellow knowing it is toxic is fraud. The ratings agencies giving high marks to bundles of loans they did not carefully check might be incompetence, but it is more likely fraud. Of course journalism being dead, the reporters did not ask Obama the obvious follow-up question, “Sir, what you’ve just described is fraud. When will you begin prosecuting it on a mass scale?! Why haven’t you started already?”

    Fraud is a fairly simple concept. The legal prosecution of it might be a little more complex, but as a way to explain things to the public, it is simple and easy to describe in ordinary human terms: deception motivated by greed.

    I cannot say that mass prosecution of all the fraud that occurred will solve the problem. It is a huge start, though. The fraud is easy to describe, easy to build public support for the prosecution of it, and it should serve as a constraint on the looting that continues to this day, an antidote to the most animal of the animal spirits.

    We have to start somewhere. Why not here?

  15. Jim the skeptic

    My point was that the financial industry did not crater the economy. I blame that on the damage done to the American worker by global free trade and illegal immigrants.

    The financial industry just took advantage of the situation. They brought on the crater a little sooner and made it a little deeper.

    Don’t get me wrong, I am in favor of regulating the financial ‘innovation’ of the last 25 years out of existence. I just don’t think the financial industry was the primary cause of most of our current economic problems.

    We want simple broad based laws and congressional oversight of a consumer protection board headed by someone like Eliot Spitzer who would be appointed for a 5 year term. (Think the FED but for consumers.) Make the states’ Attorney Generals members of the board with voting powers on a rotating basis. Give the board the power to suspend or revoke the right to do business with consumers thru interstate commerce. (No fines!) Let them try to game that! But that could never be passed into law given our current political system.

    And it would not solve our current economic problems.

    1. Yves Smith Post author

      Jim,

      This is counterfactual. European banks, in economies that have tough labor protections, got as drunk on the debt market Kool-Aid as the US banks did, and many of the biggest banks also had to be rescued.

  16. Marsha Blackburn Voted FOR:
    Omnibus Appropriations, Special Education, Global AIDS Initiative, Job Training, Unemployment Benefits, Labor-HHS-Education Appropriations, Agriculture Appropriations, U.S.-Singapore Trade, U.S.-Chile Trade, Supplemental Spending for Iraq & Afghanistan, Prescription Drug Benefit, Child Nutrition Programs, Surface Transportation, Job Training and Worker Services, Agriculture Appropriations, Foreign Aid, Vocational/Technical Training, Supplemental Appropriations, UN “Reforms.” Patriot Act Reauthorization, CAFTA, Katrina Hurricane-relief Appropriations, Head Start Funding, Line-item Rescission, Oman Trade Agreement, Military Tribunals, Electronic Surveillance, Head Start Funding, COPS Funding, Funding the REAL ID Act (National ID), Foreign Intelligence Surveillance, Thought Crimes “Violent Radicalization and Homegrown Terrorism Prevention Act, Peru Free Trade Agreement, Economic Stimulus, Farm Bill (Veto Override), Warrantless Searches, Employee Verification Program, Body Imaging Screening.

    Marsha Blackburn Voted AGAINST:
    Ban on UN Contributions, eliminate Millennium Challenge Account, WTO Withdrawal, UN Dues Decrease, Defunding the NAIS, Iran Military Operations defunding Iraq Troop Withdrawal, congress authorization of Iran Military Operations.

    Marsha Blackburn is my Congressman.
    See her unconstitutional votes at :

    Mickey

  17. john bougearel

    Complex narratives do get distorted by simplified storytelling narratives.

    “A configural thinking problem requires that a multitude of factors be considered simultaneously [and] research indicates the mind is only able to handle a maximum of three factors when they must be evaluated in a configural fashion. …A conflict exists between our desire for knowledge and our desire that it be delivered in the form of a good story…Storytellers know full well that information delivered with too many qualifiers is unappealing. Consequently inconsistencies and ambiguities are minimized…[and] that which purports to explain everything explains nothing.” ~ David Aronson

  18. Siggy

    I was taught that the factor set of limitations was 6. From that set of 6 there are 720 possibilities. Curiously, the number of primary questions are 6 (see Kipling and his good working men).

    So if we have something before that is on the order of being larger than 6 questions, deal with the issues sequentially. That is, take one question at a time. In that process we learn the naturte of the problem and we solve the problem piecemeal.

    This crisis is less a complex problem than it is a problem of many facets of the same issue. Focus to the issue and the complexity is erased and we can get to a fair and proper solution. I would begin with prosecutions.

  19. charcad

    Yves,

    Let us put it another way: Would ANYONE with an operating brain cell have demanded a “nontechnical” explanation of the Challenger disaster?

    I think you chose a very unfortunate analogy to try to make your case for hairy and inaccessible explanations. The Challenger accident investigation indeed required a “technical” approach to determine the causes. However, the ultimate findings were and are easily expressed in simple “non-technical” terms accessible to the average high school graduate.

    1. The Shuttle’s solid rocket boosters are made in sections.

    2. The joints between these sections were sealed with “O Ring” gaskets to prevent hot combustion gases from venting to the sides of the rockets.

    3. The SRB o-ring gaskets are subject to failure when they’re too cold. This possibility was known by Morton Thiokol and NASA engineers in advance of the event.

    4. Morton Thiokol and NASA management ignored this known risk factor. (NASA management was also ignoring and continued to ignore the known fuel tank foam insulation separation problems that eventually destroyed Columbia). They decided to launch Challenger under unsuitable weather conditions rather than impose further delays.

    5. Hot gases venting through a failed o-ring burned into the shuttle’s liquid fuel tank and caused it to explode.

    The reasons *why* the SRB was made in sections and needs o-ring gaskets is because a) Morton Thiokol’s facility was located in Utah, b) the SRB was too large to transport in a single piece and c) Congressional pork barrel politics prevented setting up an SRB factory adjacent to the launch facility in Florida.

    Similary, the reasons *why* NASA management chose to ignore the known risks is a subordinate study.

    So it goes with that branch of rocket science. My own prejudice founded on experience is that any “expert” who cannot produce a “non-technical” explanation is usually either hiding culpability or lacks true command of the subject matter.

    You were saying about Banking Reform?

    1. walter_map

      “My own prejudice founded on experience is that any “expert” who cannot produce a “non-technical” explanation is usually either hiding culpability or lacks true command of the subject matter.”

      Agreed. Excellent.

      Less is more.

      A real expert can explain his subject in less than five minutes to any reasonably well-educated audience, even if that audience lacks significant previous exposure to that subject. There are many examples. And you’ve managed to demonstrate this with ROCKET SCIENCE, for heffin’s sake.

      Again, that’s closely-related to my own point. This isn’t a problem you can solve by making it more complicated because a great deal of the problem is the complication itself. Better to cut the Gordian knot, rather than frustrate yourself trying to untie it and making it worse.

      That’s playing the bankster’s game, and you can’t win. They want it to be complicated. It’s the wrong game. The trick is to simplify the problem as I have done, and this approach is far more straightforward.

      “If less is more there’s no end to me, Peter Pan!” – Tinkerbelle

      1. i on the ball patriot

        Simple narrative …

        … the mega corporations, through; pac money, soft money, hard money, corporate funded lobby efforts, free junket trips, private gifts, etc. — sweet little euphemisms for graft, corruption, and influence pedaling — buy the election and install scum bag puppet Bonzo Reagan as head puppet who then opens the door to hollowing out and privatizing the space program.

        Rinse and repeat as current scum bag puppet Obama recently accelerates the big privatization scam …

        Excerpt;

        “The first shuttle—Columbia—was not launched until April 1981. President Ronald Reagan said in 1982, “Beginning with the next flight, the Columbia and her sister ships will be fully operational, ready to provide economical and routine access to space for scientific exploration, commercial ventures, and for tasks related to the national security” (23).

        This was simply false. As the report notes, the shuttle was by no means in operational mode. It was still a developmental vehicle, that is, it still had to go through rigorous experimentation and careful oversight. The goals that had been set for the agency—including 50 launches per year—were truly impossible given this experimental character. However there was a constant push to increase launches while keeping ballooning costs low.

        The Challenger disaster on January 28, 1986 threw NASA into crisis. The Commission that was set up to investigate the accident produced a report that whitewashed the role of the Reagan administration, which had pushed the launch for political reasons [see . The commission called for a number of changes in the way safety issues were handled at NASA, including the creation of an independent Office of Safety, Reliability, and Quality Assurance, but made no attempt to transform the basic problems responsible for the disaster in the first place—the contradiction between the political and economic considerations promoted by the Reagan and previous administrations and the logical evolution of space exploration as a scientific enterprise. These contradictions have become even more intense over the course of the last two decades.

        Reagan responded to the disaster by declaring that the shuttle would no longer be used for military and commercial transportation, undermining one of the major reasons that the government had continued to fund the program.

        After a long period of inactivity, the shuttle again came into operation in September 1988. It was now primarily focused on scientific projects, including the construction of the International Space Station (ISS).
        Privatization of the shuttle program

        During the 1990s, the shuttle program was subject to a wave of privatization and cost cutting. The goal promoted by the Clinton administration—in particular by Vice President Al Gore—was to reduce budget costs by opening up previously government-run operations to private corporations. Indeed, one of the main reasons the shuttle program has not been completely eliminated is that there are significant vested interests involved, particular of the giant defense contractors Boeing and Lockheed Martin.

        The move to privatize the space program—NASA is now the most privatized federal agency—was bound up with a whole epoch of American capitalism that began in the 1970s. As the economic expansion of the postwar period came to the end, any restrictions on private capital were systematically eliminated, a process that continues to this day. Regulated industries—electricity, transportation, etc.—have been deregulated. Areas where the government once played a dominant role have been privatized for the benefit of giant corporations. NASA has always used contractors, but never to the extent that it does today.”

        More here …

        Deception is the strongest political force on the planet.

      2. Yves Smith Post author

        See the update to the post. That appealing explanation you choose to believe is incomplete and serves to exculpate some responsible parties.

  20. David Dolsen

    The simple explanations of the current crises are found in these slogans:

    “Every man for himself”, and “It’s not my problem”.

    The extraordinary situation is the result of clever (but very selfish) people playing the rules right to the limits, and if necessary getting the rules changed to their advantage, as in for example rescinding the Glass-Steagall Act.

    Simply put, it’s White-Collar Crime and deserves to be treated as such.

    The explanation of HOW it happened comes down examining very precise mechanisms that interlock and are neatly hidden in a ball of logic to which the casual observer has little insight. It’s IN THE DETAILS. Broad brush strokes can neither explain it nor fix it.

  21. MichaelC

    Yves,
    I’m sorry, but what a load of elitist condescending crap!

    This story is complex, but comprehensible. We’re still in the investigation stage, so warning against jumping to conclusions is warranted but what are you really saying?

    Look at Taiibbis writing. Is that a simplified version? Maybe, but it certainly furthers the cause of reform.
    Does anyone who reads his stuff not get the complexity? I don’t think so.

    There has never been a time like the present when explanations and debates about complex issues are freely available to anyone, whether they are concerned citizens or ‘experts’, in real time, on the web.

    Your veiled warning to your readers to restrain themselves in the blogosphere lest they undermine reform efforts is stunning. I’m fine with your policy that kooks aren’t welcome here, but this piece reeks of thought control.

    That you interpret this goal

    ….a concise, constructive, jargon and acronym-free, nontechnical, unsensational, light-on-anecdote, analytical examination of the major facts of the biggest U.S. economic disaster in my lifetime….

    as a naive wish for a simple story is astounding.

    Isn’t this what you do every day in the Cfdtrade project?

    I think this is bias you were better off keeping to yourself.

    1. Yves Smith Post author

      I could not disagree with you more vehemently here.

      Simple narratives play into the hands of the banksters. Keeping the complexity of what happened in the dark, unexamined, allows them to continue to devise “innovations” that merely fatten their wallets with little to no real social benefit.

      Some readers are opposed to the use of fiscal stimulus and loose monetary policy to deal with the crisis. It isn’t hard to make the case that the tendency to rely heavily on monetary and fiscal policy (as opposed to a more balanced policy mix, one that also incorporated “other” policies, like trade and financial regulation) is the result of narratives about the Depression that told that “story” strictly in terms of fiscal or monetary policy. Thus you can make this case, and I believe this to be true, that simple narratives can lead to bad decisions, in this case bad policy.

      I am hardly engaging in thought police tactics to say that prescribing before you have a proper diagnosis is foolhardy. The desire for simple explanations is getting in the way. Posner’s demand for “nontechnical” in a crisis that involved complex products, complex BY DESIGN, that were central to both how the bubble got as big as it did and how the looting occurred, is not going to get at the root of things. It will allow the chicanery to continue because the explanations have glossed over the mechanisms by which the destructive behavior took place.

      We have dangerously limited cognitive capacity. As Herbert Simon pointed out, humans can hold at most four variables in their brain at once. So we reduce problems to our processing ability.

      You defend this defect of human reasoning as a virtue. It is better to acknowledge it and recognize that we are dealing with work-arounds than defend it.

      Let’s look at another field of endeavor. The desire for simple, quick diagnoses and fixes has led to a US medical industry that has a strong bias towards prescription drugs, because people who are sick or in pain want help and a drug looks like an appealing solution. Now some medicines are enormously beneficial, with antibiotics a tremendous breakthrough. But on the other end of the spectrum, we have psychoactive medications. Read the link earlier in the week on anti-depressants. I can similarly give you numerous examples of cases where doctors will routinely recommend surgery for certain ailments, again when the record of successful interventions for this sort of surgery is low (this is particularly true of many types of knee and back surgery). And those salutary antiboitics are being overprescribed too, as the rise of superbugs shows.

      It isn’t acceptable to admit that some ailments are difficult to treat, or may be beyond the ability of our current medical knowledge to address well. Similarly, there is no simple fix for the problem of nuclear proliferation.

      I am NOT saying do not investigate. And I am NOT saying do not reform. I am have said repeatedly elsehwhere we need to dig deep into this mess, that ain’t happening to anywhere near the degree it needs to happen.

      On other posts, you have mischaracterized my efforts to correct misinformation put out by other bloggers on AIG’s CDOs. You have take my efforts to IMPROVE the accuracy of information as some sort of effort to contain debate, which is simply a bizarre characterization. Econoblogs debate the accuracy of information and analysis all the time.

      Your attacks on my efforts to correct misinformation are more “thought police” like than anything in this post. Thought police involves limiting debate and of necessity, offering simple, superficial sloganeering and explanations as an an alternative. A demand that we deal with complexity, and not shy away from it, is the polar opposite of that sort of activity.

      I suggest you look at the 1933 and 1934 securites acts. There were not “simple” reforms. They did have some very clear principles, namely,

      1. Provide frequent, timely disclosure about financial condition and results, top executive and director backgrounds, shareholdings, and compensation

      2. Discourage insider trading

      3. Prevent market manipulation

      But the mechanisms by which those were achieved were complex.

      Similarly, look at the theories offered for the crisis by commentors on this and other posts. They include:

      1. The fractional banking system

      2. Overly loose monetary policy (some would argue a mere subset of 1. but others who are happy with 1 are not happy with 2)

      3. Mortgage fraud

      4. Excessive consumer borrowing

      5. Deregulation

      6. Regulatory capture (as in regs were fine, but they were not enforced)

      7. Poor labor and immigration policies

      8. Global imbalances

      Even if you accept that some/all of these are correct (and some are connected, which came first, global imbalances or excessive consumer borrowing? And didn’t excessive borrowing come from poor labor policies? Or was it the result of deregulation? Or overly loose monetary policy?) many of them are framed at such a high level of abstraction as to not lead to concrete actions (look at them versus the principles behind the 1933 and 1934 acts, those principles clearly reflect a much more granular understanding of the problem).

      1. Anonymous Jones

        I’m very late to this thread, but this was just a great comment, Yves! The only thing I’d add is that we should sometimes simplify solutions even if that means such simplified solutions are not ‘optimal’ in efficiency terms. This happens all the time in my business. People try to structure around legal, regulatory and tax burdens and end up with a structure they don’t understand and can’t implement on a daily basis, leading them to have even more costs in the long run because they screw something up (mostly because they and their agents didn’t understand the structure).

        Anyhow, best part of the comment thread — everyone’s in favor of simplicity and the naive belief that non-experts can do everything; yet these same naifs hold diametrically opposed beliefs on almost everything! Methinks there is an inconsistency there somewhere. Hilarious! It’s like the guy in a crowded room arguing a point that everyone disputes and he shouts, “But this is just common sense!” I’m sorry, but if an issue has many people arguing on all sides of it, that tends to make the case that the issue isn’t ‘simple.’

        All of you who don’t like experts, please, next time you need surgery, I’ll give you a 50% discount versus the hospital as long as you sign a waiver for any medical malpractice! Awesome! People will never be stopped in their quest to believe what they want to believe in the face of *all* available evidence to the contrary!

  22. Jim the skeptic

    charcad says: “My own prejudice founded on experience is that any “expert” who cannot produce a “non-technical” explanation is usually either hiding culpability or lacks true command of the subject matter.”

    I could not agree more!

    Physicist Richard P Feynman demonstrated the Challenger’s problem with a piece of the O-Ring material and a cup of ice water!

    1. i on the ball patriot

      Simple narrative …

      … the mega corporations, through; pac money, soft money, hard money, corporate funded lobby efforts, free junket trips, private gifts, etc. — sweet little euphemisms for graft, corruption, and influence pedaling — buy the election and install scum bag puppet Bonzo Reagan as head puppet who then opens the door to hollowing out and privatizing the space program.
      Rinse and repeat as current scum bag puppet Obama recently accelerates
      the big privatization scam …

      Excerpt;

      “The first shuttle—Columbia—was not launched until April 1981. President Ronald Reagan said in 1982, “Beginning with the next flight, the Columbia and her sister ships will be fully operational, ready to provide economical and routine access to space for scientific exploration, commercial ventures, and for tasks related to the national security” (23).

      This was simply false. As the report notes, the shuttle was by no means in operational mode. It was still a developmental vehicle, that is, it still had to go through rigorous experimentation and careful oversight. The goals that had been set for the agency—including 50 launches per year—were truly impossible given this experimental character. However there was a constant push to increase launches while keeping ballooning costs low.

      The Challenger disaster on January 28, 1986 threw NASA into crisis. The Commission that was set up to investigate the accident produced a report that whitewashed the role of the Reagan administration, which had pushed the launch for political reasons [see . The commission called for a number of changes in the way safety issues were handled at NASA, including the creation of an independent Office of Safety, Reliability, and Quality Assurance, but made no attempt to transform the basic problems responsible for the disaster in the first place—the contradiction between the political and economic considerations promoted by the Reagan and previous administrations and the logical evolution of space exploration as a scientific enterprise. These contradictions have become even more intense over the course of the last two decades.

      Reagan responded to the disaster by declaring that the shuttle would no longer be used for military and commercial transportation, undermining one of the major reasons that the government had continued to fund the program.

      After a long period of inactivity, the shuttle again came into operation in September 1988. It was now primarily focused on scientific projects, including the construction of the International Space Station (ISS).
      Privatization of the shuttle program

      During the 1990s, the shuttle program was subject to a wave of privatization and cost cutting. The goal promoted by the Clinton administration—in particular by Vice President Al Gore—was to reduce budget costs by opening up previously government-run operations to private corporations. Indeed, one of the main reasons the shuttle program has not been completely eliminated is that there are significant vested interests involved, particular of the giant defense contractors Boeing and Lockheed Martin.

      The move to privatize the space program—NASA is now the most privatized federal agency—was bound up with a whole epoch of American capitalism that began in the 1970s. As the economic expansion of the postwar period came to the end, any restrictions on private capital were systematically eliminated, a process that continues to this day. Regulated industries—electricity, transportation, etc.—have been deregulated. Areas where the government once played a dominant role have been privatized for the benefit of giant corporations. NASA has always used contractors, but never to the extent that it does today.”

      More here …

      Deception is the strongest political force on the planet.

    2. Yves Smith Post author

      Jim,

      Reader John L points out, via e-mail, that the O-ring explanation is misleading. It does say why the rocket blew up, but it does not explain why the crew died. Their deaths resulted from OTHER design constraints not widely discussed in the media. So your touting of Feynman is a perfect illustration of the problem. So the focus on the O-rings served to divert attention from other actors who were culpable.

      From John L:

      The idea of a re-useable space shuttle is one only a contractor could come up with. Its retarded, but it looks cool, and costs a lot.

      Rockets blow up. When a rocket is performing correctly is blows up under the rocket. When one of a billion things go wrong, the oxidation of the fuel no longer takes place where it should, under the rocket.

      Because of this there are a few very simple things that can be done to protect the payload. One of them is to put the payload as far from where the explosion is supposed to happen, on top You still have to harden that payload, but putting it on top of the rocket will lessen the chances that something goes wrong and fries the payload. If the fuel oxidizes by accident early, there is also less cross sectional area facing the payload. I can hit you with a broom stick, or jab you with it (which do you think might be easier for me?)

      Put the passengers next to the fuel, and you are going to have problems. So, you have to harden the compartment that they are housed in. Its too expensive (and too heavy) to harden the entire re-usable ship, so you focus your effort on the cabin. This leads to the falling tin can with a windshield if something goes wrong.

      The Apollo rockets all had the ability to bail out the crew, for the reasons above. An explosion would force the passenger cabin up and away from the rest of the explosion, and then a built in parachute could deploy and return the capule to the earth safely.

      There was no way to build a parachute into the shuttle, It would have been blown up by the explosion next to and around the passenger cabin.

      You end up rebuilding the rocket each time anyway, through inspection or parts replacement. You aren’t really reusing anything, you are just forcing all of the contractors to work on top of each other, and to all have to come to one place. Modular construction is the way to go, the shuttle program proves it.

      The lobby is just like the banks though. They know that the end of the shuttle means no more govt money. They have been fighting the redesign all along. Just like the banks.

  23. dd

    Regulated versus unregulated is a simple narrative that explains what happened. The once highly regulated financial system is now a totally unregulated financial system operating inside the remnant shell of the visible regulated sector. The confusion is the populace still believes the system is “regulated” not realizing the most profitable activities are unregulated and designed to loot the regulated system.
    Geithner and Paulson’s testimony on AIG laid out the specifics of how “highly regulated” entities were easily looted by unregulated activities and entities. Then they had the moxie to blame the state regulators who had no access to the holding company or the “proprietary” trading of the London entity.
    The essence of the issue in a nutshell:
    “The people who were responsible for looking at those insurance companies, frankly, had no idea of the risks to the insurance firms, and you could not separate those companies from the companies that had taken terrible risks,” Geithner testified.

  24. chas

    I think it was Albert Einstein who said –

    “Any intelligent fool can make things bigger, more complex, and more violent. It takes a touch of genius and a lot of courage to move in the opposite direction.”

    I happen to agree. I think the solution to the financial crisis is quite simple – get rid if the Fed. Congress assigned them the responsibility to maintain stable prices & full employment & the Fed & the banks have failed.

    To achieve full employment the banks have the privilege & responsibility to invest other people’s money with this goal in mind. And what did the banks accomplish? They lent other people’s money to borrowers to consume more (houses) & invest in nonproductive assets (houses). Why? For quick profits. Why CDO’s, CDS’s, MBS’s, etc? For quick profits & big bonuses.

    And why didn’t the banks use other people’s money to invest in the real, productive, long term job creating economy? Simple answer. No quick profits & bonuses.

    And who was responsible to insure the banks invested other people’s money in the real economy to produce full employment? The Fed. And who is responsible for the Fed? The brilliant politicians in Congress. So the banks, the Fed & Congress have all failed.

    How about the need to understand CDO’s. CDS’s, MBS’s etc, ad infinitum? We don’t need to. All we need to know is that the banks (management) & Fed (management) have failed to maintain full employment & need to be replaced.

    By whom? Congress. Congress has the ball & they need to know it. Congress is responsible for 6 to 17 million Americans being unemployed. If only we had a parliamentary system so we could call for elections now.

    1. Yves Smith Post author

      chas,

      Please re read my post. Arguing against simple stories is not an argument that the crisis can be analyzed. But I do oppose the idea that it can be boiled down to a SINGLE cause, and point out in comments, how the focus for SINGLE explanations has led to bad policy.

      Someone has to handle central banking functions. Before the Fed was created, ti was the Treasury. Given that the Treasury is a badly captured as the Fed, do you really think that is a solution?

      The UK has a parliamentary system, and their banking industry is a bigger percent of GDP than ours. And they are not having much more luck than we are in containing the financiers, even though their central bank and their main banking regulator (the FSA) is on the case. But I am more optimistic they will prevail than we will, and it isn’t due to their parliamentary system, it’s that their central bank has the guts to do its job.

      1. chas

        I don’t think it’s our job to fix the financial system. It’s Congress’s job. That’s why we elected them & that’s why we’re paying them & giving them big raises every year.
        And they keep telling us how brilliant they are.

        How about us just laying low & letting them twist in the breeze for a while? Until the next election? Then we’ll get rid of them.

  25. chas

    May I add –

    What does all this say about the big banks & Fed & most importantly Congress?

    They don’t give a $hit about the long term viability of the real economy that produces all their expensive cars, homes & clothes. And which produces all the food, clothing, shelter, transportation, energy & health care for them & everyone else in this country.

  26. Well, then, we’re doomed, aren’t we, because the hunger for simple stories is one of our basic urges, and this televisual era we’re still in satisfies that hunger and then some, until so filled with simplicity our ass cheeks hang over the side of the Rascal we have to use.

    Looking forward to reading Moe Tkacik’s piece. I love it when she guest-edits Deadspin. O how the frat boys howl in comments. She’s fearless, like those guys who recorded for Impulse! in the 60s.

  27. tz

    What is not discussed is that the complexity ITSELF is a cause of the failure. You can find many posts of the “complexity” of the Kennedy assassination. But the “complexity” is merely a way to avoid or to promote a point of view.

    If we cannot handle complexity, we don’t need a “simple” narrative as much as keeping the system simple enough to keep under control.

    The challenger disaster was a launch under 4 or 5 sigma conditions – freezing weather. You can try to microanalyze every mechanism, but the bottom line is that under normal conditions it would not happen. “Don’t launch when it is really cold” is perhaps too simple, but it is both accurate and true.

    The systemic crisis was PREDICTED many years before. But the whole was an attempt to try to make 100:1 LTCM style leverage “safe”. Or to make “liar loans” profitable.

    Or if someone runs into a jungle – is he killed by a disease? toxic insect or arachnid? snake? jaguar? toxic plants? All very complex and hard. How about not going into the jungle in the first place?

    Cancer is complex, but maybe not smoking would lessen the risk of lung cancer? Well, we can’t insist on that, so we just have to let people smoke and keep working toward a vaccine or cure or something.

    The post presupposed it is perfectly normal to take excessive risks, use excessive leverage, and when the thing blows up, say we can never understand why it happened or prevent a repeat because of the “complexity” of how it blew up.

    But “complexity” is merely a false semantic switch with “risk+leverage”. You engage in risky things, some of them will blow up and with leverage it will magnify the explosion.

    What is complex about not loaning to people who refuse or can’t state their income?

    What is complex about borrowing billions to magnify the bets?

    There are those who are debating the Great Depression – but the huge margin loans and calls? The increase in installment consumer credit?

    If you are asking “how can we tweak a really complex and unstable risky leveraged system so it won’t blow up next time” the answer is you can’t. The solution is simple in the way asking “how can we square the circle or trisect an angle” is simple. You can only prevent excessive risk and leverage.

    Perhaps “don’t use leverage” and “don’t take excessive risk” might be simple and simplistic, but that does not make them untrue.

    1. Yves Smith Post author

      TZ,

      With all due respect, the post did not presuppose that it is normal to take excessive risks. The post specifically said that complexity led to looting. How can that be construed to be saying excessive risk taking or leverage are “normal”?

      The issue is that overly simple explanations can impede reform. And my case example is the securities reform of 1933 and 1934. They were durable and effective reforms, and had fairly simple aims, but making them operational took a great deal of understanding of the details of the chicanery that preceded it to keep it from happening again. Those regulations specifically included restrictions on margin lending and rehypothecation (using customer securities as collateral for borrowing).

      To use your Amazon metaphor, we have designed a financial system that effectively goes though the jungle. The roads around it have fallen into disuse. It will be very costly and a very long term project to bring those old roads back into use. And on an ongoing basis, using those old roads looks more costly than going through the jungle, so the case against the jungle road needs to be bullet-proof.

      It may seem easy to say, “don’t use leverage” but we have a world economy that now depends on it, and going cold turkey would produce a meltdown.

      That is why I continue to maintain that simple narratives MAY impede reform (and readers seem to skip past how I formulated the issue). We need to find ways to characterize the problem that lead to solutions that are actionable. While leverage clearly is a big problem, we have the elephant in the room that we are addicted to it. So we need a formulation of the problem that takes that issue into account.

      Moreover, if you want to find out who engaged in predatory behavior, as opposed to was merely stupid (aka greedy and deluded), you also need to dig into the complicated mechanisms. And I submit that failure to do that will allow people who ought to be seen as criminals to remain in positions of power. So arguing for simple stories allows for people who knowingly engaged in destructive behavior to get away with it.

  28. Too dumb to understand complexity

    “…I submit it is not possible to have an adequate description of the crisis without digging into, exposing, and explaining matters that ARE technical. Now that can probably be broken down in a way to make it accessible to laypeople but it will require a willingness to learn a bit…”

    Yves, I respectfully disagree. While it would be hard to argue with the logic of the above comment if one is trying to convince a judge/jury in a civil or criminal proceeding. However, that’s not where we’re at. Seems to me that success will be achieved only if a clear compelling case can be made in the court of public opinion. That setting demands simplicity.

    I continuously struggle to communicate tax and financial issues to business clients on a daily basis. I’ve found that many intelligent people, including PHD’s, can be confused and/or intimidated by financial issues. It’s become apparent to me over the years, that in these situations, the key is to deliver the message in a simple form using stories or analogies. That’s what most people can connect with.

    What is needed, therefore, is a two-track approach. One track would involve developing the complex, technical; flow-chart analysis that connects the perps to the smoking gun(s) as you have so ably accomplished. The second track would involve translating the key concepts in the first track down to the most basic explanation that answers the what, when, where, why and how questions. Hopefully, the case can be presented in as few words as possible –and- will also connect emotionally with lay people. Find a way to get their attention, and hold it, using the second track. That will provide the political cover for the good guys to follow through on the first.

    Its clear there are few writers(if any) who are more qualified and capable than you of carrying the torch, leading the way through the labyrinth of financial mayhem and identifying the most egregious violations in all of their gory detail. However, we also need that special someone with the creative talent to translate the technical concepts that you’ve described over the years, into the clever analogy, metaphor or story that will create an emotional connection with a large number of people. I, like many of your readers, know of someone who has that talent …

  29. Anyway to read your story online, Yves? I’d be willing to pay if it’s available digitally, but it doesn’t look like that’s an option.

  30. Jim the skeptic

    Yves said: “Reader John L points out, via e-mail, that the O-ring explanation is misleading. It does say why the rocket blew up, but it does not explain why the crew died. Their deaths resulted from OTHER design constraints not widely discussed in the media. So your touting of Feynman is a perfect illustration of the problem. So the focus on the O-rings served to divert attention from other actors who were culpable.”

    I followed the Challenger disaster investigation closely.

    There is no way to build a space launch vehicle that is perfectly safe at this time or in the near future. The Apollo program lost one crew on the ground due to a fire and nearly lost a second crew while on a moon mission. The design of any piece of equipment involves compromise and the shuttle was no different.

    If the shuttle could not be operated safely with the segmented solid fuel boosters then you would be correct. But it could be operated safely by refusing to launch when it was cold enough to impair the O-Ring material. NASA management was warned by the contractor that the Challenger launch was risky in those low temperatures.

    You could argue that the deaths of the crew was caused by poor decision making by NASA management. But that would not be the ‘primary cause’.

    So it is with the economy. The banks did us no favors by their unregulated reckless behavior, but they were not the ‘primary cause’.

    The primary cause was that consumers incomes had not kept up with inflation. Their savings went from 10.8% in 1984 to .5% in 2005. And they removed about $57Billion in equity from their homes in 1991 and by 2005 they were removing $577Billion to use for ‘Personal Consumption Expenditures’.

    You cannot have an economy without consumers. If I can produce what I need then I am happy in my little world. If I can produce more than I need and can find an additional consumer than I am even happier in my little world, otherwise I just save the sur. Nothing else is absolutely necessary in this minimal system. We have set up a much more complicated system, but the consumer is still the most important part of that system. American consumers made up a market that was the most valuable thing on earth, and the ‘powers that be’ damaged it! It WAS self sustaining!

    Look at this chart from Calculatedriskblog.com on 5 Feb 2010:

    The “graph shows the job losses from the start of the employment recession, in percentage terms (as opposed to the number of jobs lost)” for the recessions after WWII.

    Note that ‘job recovery back to peak’ for every recession until 1980 was less than 24 months. Note that in the recession of 1980 it took over 27 months to recover back to the peak. Note that in the recession of 1990 it took over 30 months to recover. Note that in the recession of 2001 it took over 46 months for jobs to recover. The plot for the current Great Recession shows that we are 25 months from the peak and it is obvious that we will not recover until long after 46 months.

    So between 1990 and 2001 pressures were building in the economy. During that time business was growing and government was getting control of deficits. But consumers were not doing so well. It is evident that the consumer problem’s occurred long before the rest of our problems developed. So logically they are more likely to be the primary cause.

    I suppose you could argue that workers/consumers had to be paid less by business since foreign competition was killing them. And there we get back to poor congressional and presidential decision making. They modified the system to encourage global free trade without any requirement for balance. (The business world saw this as a positive.) Over the short term, business profited by importing cheap parts for their products and setting up production in foreign countries. But they saw their domestic operations damaged. And now we are beginning to hear about the theft of intellectual property rights, dangerous or poor quality of foreign products, and currency manipulation. It is difficult to understand how normally intelligent people could have been snookered this way!

    Sorry for the length.

    1. bob

      The astronauts were not killed by the explosion. They were killed by the passenger compartment falling from 65,000 feet.

      Six minutes where the astronauts were trapped in the cabin.

    2. anon

      you identified the primary cause as :

      The primary cause was that consumers incomes had not kept up with inflation. Their savings went from 10.8% in 1984 to .5% in 2005. And they removed about $57Billion in equity from their homes in 1991 and by 2005 they were removing $577Billion to use for ‘Personal Consumption Expenditures’

      I think you may be interested in this video of Eliz Warren’s analysis of that element.

      She explains where that Personal Consumption Expeditures increase went, (mainly to fund health care, and housing. The increased cost of housing is attributed to ‘buying an education”, in other words housing price increases are due to premiums paid to live in decent school districts effectively privatizing costs of public education).

      Her interpretation is in stark contrast to the conventional impression that middle class americans were profligate spenders deserving a commupance.

      You may be right about the primary cause, but not juat for the reasons you describe.

      One could argue that the sub prime speculators funded by the bankers and FEDs low rates policy drove up the costs of these core middle class necessities that ended in a mass looting of the middle class by the oligarchs as a primary cause rather than the state of the ‘economy’.

      In other words, the ‘inflation’ the middle class was trying to keep ahead of (housing/health care) was less a result of monetary inflation, but, in the case of housing, asset inflation by design. The banks (and the GSEs) intended to inflate the bubble, and drain it into their own pockets. The govt allowed them to do it and by bailing them remains complicit in the looting of the middle class as a result of their ownership of the post crash housing funded with pre crash debt. Its a travesty.

      1. Jim the skeptic

        anon says: “She explains where that Personal Consumption Expeditures increase went, (mainly to fund health care, and housing. The increased cost of housing is attributed to ‘buying an education”, in other words housing price increases are due to premiums paid to live in decent school districts effectively privatizing costs of public education”

        The effects on the consumer that I describe were just beginning to be significant between the 1990 and 2001 recessions, so consumers were still relatively healthy. And with the Clinton administration’s attempt at health care reform failed, inflation in health care actually moderated. Also inflation of home prices was not a major factor during that time.

        Between the the 2001 recessiion and the Great Recession, health care costs were rising sharply and so was the cost of housing. And by that time the consumer was already in serious trouble. Refinancing to take advantage of lower interest rates became the order of the day, and it was easy to take out additional funds to pay off debt. The Greenspan/Kennedy study segregated dollars taken out of the home to purchase another home, and I did not include those dollars in my stats.

        anon says: “Her interpretation is in stark contrast to the conventional impression that middle class americans were profligate spenders deserving a commupance.”

        On that I agree with her completely.

        anon says: “In other words, the ‘inflation’ the middle class was trying to keep ahead of (housing/health care) was less a result of monetary inflation, but, in the case of housing, asset inflation by design. The banks (and the GSEs) intended to inflate the bubble, and drain it into their own pockets. The govt allowed them to do it and by bailing them remains complicit in the looting of the middle class as a result of their ownership of the post crash housing funded with pre crash debt. Its a travesty.”

        I don’t see a conspiracy. The financial institutions did what was in their nature, seek profit. That is why they should never have been deregulated. Not because they caused our Great Recession but because their recklessness materially contributed to the damage.

        If we assume they had the power to cause this Great Recession then we must assume that they could not be allowed to fail. I do not agree with that assumption, let them fail and break them up in the bankruptcy. Let’s hope our federal government realizes that before the next demands for bailout. Borrowing money to bailout the financial institutions is a travesty.

  31. Jim the skeptic

    Yves said: This is counterfactual. European banks, in economies that have tough labor protections, got as drunk on the debt market Kool-Aid as the US banks did, and many of the biggest banks also had to be rescued.”

    I agree that European economies do have much stronger labor protection and that they did drink the debt Kool-Aid.

    European bankers used cheap money to jump on a money making gravy train and they will pay for it but that was not the cause of their recessions. The downfall of European economies was that they are very export dependent. We are not!

  32. JTFaraday

    But people do seem to have settled on a simple, single cause: “deregulation” backed up by “free market fundamentalism.”

    Given the ongoing involvement of the US federal government in the US and global economy, this seems an inadequate description, to me.

  33. Sergei

    Sometimes things get so complex that even those who should understand them start getting lost. Then it makes sense to go back to the drawing board and start from scratch. This is precisely the case we have today. This system is sunk so much in acronyms that nothing can fix and save it.

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