At Bloomberg Barry Ritholtz lists ten misconceptions about the financial crisis of 2008:
- Lehman’s collapse caused the crisis
- If not for X, we would have been OK
- Repeal of Glass-Steagall
- Bailouts were the only option
- Taxpayers were repaid in full and even made a profit
- No one went to jail because stupidity isn’t a crime
- Borrowers were as blameworthy as lenders
- Poor people caused the crisis
- The Fed made a mistake by stepping in when Congress refused
- Lehman could have been saved
I agree in particular with his remarks about #4
There were many other options, but they would have been very painful and required considerable foresight. I believed then (and still believe) that the best course of action would have been prepackaged bankruptcies for all the insolvent institutions instead of bailouts. I would have had the federal government provide debtor-in-possession financing, allowed qualified private institutional investors to bid on the assets thereby letting markets set the valuations, with the government picking up the rest. It would have been more difficult in the short term, but the economy would have rebounded much sooner.
and I said so at the time. Why didn’t we take that course of action? I think the only genuinely viable explanation is regulatory capture.
There will be a next time. The way we dealt with the last time practically insured there will be a next time. And we will deal with it the same way for the same reasons.