Paul Krugman collects six contending narratives about the causes of the global financial crisis:
- Size: Our largest financial institutions have just gotten too big
- Shadows: The rise of shadow banking, institutions that fulfill banking functions but evade the regulatory regime, has undermined stability
- Opacity: We've come to rely on complex financial instruments that neither regulators nor the private sector [understand]
- Predation: Financial firms deliberately misled consumers and investors
- Government intervention: Public policy pushed lenders into making bad loans, especially to the poor
- Monetary mismanagement: The Fed did it by keeping interest rates too low for too long, and/or policymakers panicked in 2008 and spooked the markets
He goes on to discuss the merits and problems of each before declaring himself most persuaded by Shadows, with some contributions from Opacity and Predation.
My bottom line: even among experts with no obvious axe to grind there is a distinct lack of agreement about what caused the crisis and what measures would be most likely to prevent the next one. Combine this technical hair ball with a powerful financial industry that wants nothing to change and it gets very hard to be optimistic we can fix this. We will of course have legislation that the proponents will claim is effective in order to get these tough issues behind them politically--but fix the problem???