What caused the credit crisis?
People have been speculating about this for months, and until recently most of the conversation on the topic was relegated to our corner of the blogosphere and academia.
During the lead up to the current headline events, this debate has been enriching, and although people disagree about the fundamental causes, it is clear that a full accounting of the problems includes a variety of the following:
- Everyone was overconfident in their understanding of the world and risk
- Mortgages were issued to people who could not afford it with terms that some people didn’t understand
- Sophisticated institutional investors invested in products with risks they misunderstood
- Credit Rating Agencies rated securities much more highly than they should have
- “Wall Street” created complex securities (including CDOs and CLOs) which increased leverage throughout the system, making the repercussions of failure greater, and they were highly incentivized to do so
- Insurance companies and bond insurers guaranteed far more risk than they realized or should have
- Mortgage brokers and originators were incentivized to issue as many mortgages as possible
- Banks were allowed to create off balance sheet entities, which did not affect their regulatory capital requirements
- No one (with any clout) was standing outside the system thinking about and measuring what would happen if things went wrong
However, now that the credit crisis has entered the mainstream dialogue, rather than recognizing that this issue is complicated and that many factors are to blame, people are trying to wrap a bow around things and blame it on the “left” or the “right”.
Case in point, one of many similar blog posts from this morning:Who is to Blame for the Economic Crisis? The Republican Argument
The post references a video suggesting that somehow the push to issue people affordable mortgages is to blame for the credit crisis.
This blatantly political maneuver would be more infuriating if it was not so obviously overly simplistic and false. One simple counterargument to this is that if institutional investors bothered to do their homework on the securities they were purchasing rather than relying on credit ratings and the assurances of “derivatives” salesmen, they would have charged more, pricing in the reality of people’s inabilty to pay. But they didn’t…for lots of reasons.
Overly simplistic binary thinking is widespread in politics.
Unfortunately, this idiotic binary debate is symptomatic of a broader phenomena in our society: politicians are too intellectually condescending to describe things in the honest and nuanced way that they are in the world.
I refuse to believe that the American people are too stupid to understand. In fact, perhaps the reason people are fed up with politics is because the smokescreen is so obviously false.
Throughout my life I have found the “us against them” mentality of the two-party political system to be stomach-churningly simplistic. There are far more people and ideas than can be represented by “red and blue.”
It is no coincidence that the two presidential candidates both espouse politics beyond “party”. In times like today, it is clear that people “hope” that things will “change” and that someday it will be true that politicians put “America first.”
In the mean time, why don’t we seek to engage in a more nuanced debate. I for one reject this antiquated binary thinking. Computers can’t replicate human ingenuity, and I think we can avoid using their language.