A useful analysis. While this could be read as blaming the government
for everything, the implication is that the industry *needs* the
government to regulate it appropriately, as otherwise the market
incentive always ends up leading to taking on excessive risk...
-- Ernie P.
http://correspondents.theatlantic.com/richard_posner/2009/05/a_failure_of_capitalism_ii--whom_to_blame--richard_a_posner.php
In fact the bankers took too many risks from an overall economic
standpoint, and that is the immediate cause of the economic hole we're
in. They made too many risky loans, especially in real estate, and
when the risks materialized the banks' assets, which included many
real estate mortgages and securities backed by such mortgages, plunged
in value. The banks found themselves undercapitalized and reduced
their lending, which slowed economic activity, which began the
downward spiral that we're in.
They were permitted and indeed encouraged to take risks that were too
great from the standpoint of economic stability by the government
itself, in two major respects. First, the regulatory controls that had
once limited the amount of risk that banks could take, in recognition
of the potentially catastrophic effects on economic stability of a
collapse or near collapse of the banking industry, were gradually
dismantled, beginning in the 1970s. Not completely dismantled, but
enough dismantled to allow competition almost free rein to push the
bankers toward taking more risks than were good for the nation's
economic welfare.
And second, the Federal Reserve pushed interest rates too far down at
the end of 2000 and kept them there longer than made economic sense.
The results included a housing bubble, a credit bubble, the bursting
of the bubbles, and the ensuing swoon of the banking industry--all of
which I'll explain in the next blog in this series.
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