Wednesday, February 11, 2009

The "Cause"

/start parody

Everyone thinks they know how the credit crisis began. Everyone is wrong. Only I, The Recapitulator, have the correct answer, which I am about to divest upon you.

Behold, mere mortal, my perfect chain of logic and kneel before my powers of deduction...I should get at least a cabinet position in the treasury for this incredible finding.

The crisis was caused by sub-prime mortgages. The increased demand for sub-prime mortgages was caused by a decrease in lending standards and a directive from government to the major financing providers (Fannie, Freddie). This was caused by lobbyists from said companies. These lobbyists are lawyers who are paid to influence politicians on the behalf of companies. Lawyers are educated at Law School. The first law school in the United States was Lichtefield, followed closely by Harvard and Yale.

Therefore (drum roll please), we should destroy these schools. Only then will we cease to suffer from bad policy and a general corruption at the Federal level of regulatory governance.

/end parody

Unfortunately, the above analysis is not far from some of the causal relationships being talked about in relation to the current crisis. With so many moving parts in an economy, a full and causally tight description is impossible.

The general language of Minsky provided a better model than politicians attempting to diagnose "a" cause for the bubble. Of course, this will not stop said pols from legislating regulation based on faulty premises.

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