[quoderat]

I personally don't think it was caused by those things, though I am sure that there are those who do. I think the five major factors that contributed to it, in rough order of importance:

1) Too much leverage, without understanding the risks.

2) Trade imbalances causing capital flow imbalances.

3) Complete lack of regulation and lack of enforcement of existing regulation.

4) A culture of "gotta have it now."

5) Productivity surge that couldn't last.

As for greedy CEOs, many of them were non-productive parasites on the system (John Thain, etc.), but it wasn't their fault.

And as for capitalism, my observation was that it's going to change drastically, not that it was at fault.

[dantheman]

I think you are missing the systemic causes -- the low cost of money and its devaluation through inflation cause makes taking risks more economical (safe investments lose money). The markets are more regulated now than they've ever been.

The cause of this crises has been building for a long time, and goes back to the 70s when the united states went off the gold standard.

Additionally, there were things that happened that never happened before. For instance selling stock in financial institutions, which incentivises risk taking. This of course led to a mistake on the public's part of not realizing what they were investing in was riskier than they thought.

A culture of "gotta have it now." doesn't mean anything except that those participating in it will be poorer than those who don't, and lending to the first group is riskier than lending to the second so their interest rates should vary.

Productivity is constantly increasing, and will be increasing at faster rates. As for CEOs if they were acting wrongly then their board, or shareholders should revolt. If it's a private company then the owner, if the CEO is the owner then it's his to do what he wants with it.

[quoderat]

Ah, the old gold standard canard again. Not even worth refuting these days, so I won't try.

" As for CEOs if they were acting wrongly then their board, or shareholders should revolt."

Hasn't happened yet, but it's a nice pie-in-the-sky fantasy.

I'm perplexed by many people's ideas here that the best way the system self-corrects is by effectively allowing the system to self-immolate.

Is there no better way?

"Productivity is constantly increasing, and will be increasing at faster rates."

Doubtful, but even if true, when will that productivity lead to better standards of living for all but the wealthy few? Incomes of the richest Americans more than doubled in the past eight years. Do you think they got twice as productive?

Before you answer, remember that in the financial sector at least, in the last two years, banks have lost more money than they have made in profits in the last 2,500 years of banking — even adjusted for inflation.

[gravitycop]

Incomes of the richest Americans more than doubled in the past eight years.

Are every one of today's richest Americans the same individuals who were the richest Americans eight years ago? http://allfinancialmatters.com/2007/03/12/who-was-or-is-the-...

the people in the bottom 20% 10 years ago are in most cases not the same people that are in the bottom 20% today. This is the same misconception inherent in the argument that "minimum wage workers" have not gotten a raise in [X] number of years. It is highly unusual that people making minimum wage at one point in time are the same people that are making minimum wage many years later. The same is true for net worth, which almost as a rule takes time to acquire. Many of the people in the bottom 20% 10 years ago were just starting out or fairly young, and now, 10 years later, are much higher in the percentile rankings. I know it is true for me - I had negative net worth 10 years ago. So it is completely rational to expect that to some extent the lower tiers don’t grow as much as the upper tiers - you’re not taking the age/time factor into consideration.

I would be interested to see the same numbers broken down by age group - for example, how is the net worth of people in the bottom 20% and top 20% changing just for people in the 40-45 age group.

http://www.urban.org/Publications/406722.html

The [U.S. Department of Treasury (1992)] study uses income tax return data between 1979 and 1988, tracking the adjusted gross income of a group of households that paid income taxes in all ten years examined. The study finds that 86 percent of individuals who were in the bottom quintile in 1979 had moved up by 1988. An individual in the bottom quintile in 1979, in fact, was more likely in 1988 to be found in the top quintile than in the bottom one. [...]

Cox and Alm (1996) [...] use the PSID to examine individual incomes between 1975 and 1991 for individuals who were age 16 or over in 1975. 17 They find that only 5.1 percent of individuals in the lowest quintile in 1975 remain in that quintile in 1991, while 29 percent of such individuals are in the highest quintile in 1991.

[dantheman]

System Correction: Sure you can try to go in and fix a system, but a lot of people disagree with how you are going to do it. Central planning doesn't work due to information problems (lack of prices), and freedom issues. So any change you make to the system will be short lived, but then open up a can of worms as people are free to take risks and not worry about the downside. Second, a lot of people object to forcing people to do things at the point of a gun.

Productivity & Wage Increase I think you are missing a fundamental point, when productivity increases it is normally the result of a capital investment. The person who makes that investment is the one who profits, not normally the person whose productivity has increased. For instance if I'm making shoes, and my boss buys a machine that allows me to increase my productivity 10 fold, well he will see most of that reward while I may see a small increase in my wages. He took the risk of investing in that machine, and thus should see the reward.

2500 years of banking: As for you last post I don't know if that is true or not, how much actual money have the banks lost -- not lost for their clients, but lost themselves.

[pwk]

Incomes of the richest Americans more than doubled in the past eight years. Do you think they got twice as productive?

Well, lots of people are now coding in Ruby/Python/etc instead of Java/PHP/C++/etc.

(Written only mostly tongue in cheek)

[kirse]

I would agree with most of your reasons, but for each of them you need to ask "why" until you get to the real source of the problem.

For the most part, the greediness of people is why we had such ridiculously leveraged financial securities and special-purpose vehicles etc. designed to stuff as many fistfuls of cash as possible into the pockets of those who could game the system the best.

Greed was the cause, and insane levels of leverage were the flimsy supports for this recent collapse of the financial house of cards.

Of course, that's not to say leverage is inherently bad, but in excess it clearly points the way to financial ruin.

[quoderat]

I agree with you. Well-stated.

And that's why I feel that even if regulation isn't perfect, and even if it sometimes is counterproductive (which it is!), it can often help to stave off such things as this.

[corentin]

Well, then just how much did regulation helped prevent this whole fiasco?

[quoderat]

That's my whole point.

It didn't prevent it, but the lack of it sure contributed greatly to it all.

The biggest single example: the exempting of the four largest investment banks from the previous 12-to-1 leverage rules, allowing them to leverage up to 40-to-1, thus greatly exacerbating the fallout and causing further follow-on crises.

That, among many, many other things, would not have occurred without those IBs being exempted from previously-existing regulation.

Do you really believe non-regulation will be the panacea for all these ills?

Somalia is pretty unregulated. Maybe try your luck there.

[corentin]

Companies doing risky stuff shouldn't be too surprised when they suddenly run out of good luck.

On the other hand, if I were running a company and I knew that my buddies in Washington would end up bailing me out with other people's money because I'm "too big to fail", I would be a fool not to take as much risk as I can. With state capitalism, you can have your cake and eat it.