I wonder if the following sentence from Paul Krugman’s blog fills you with as much dread as it does me:
Health reform, for all the complexities of its details, was a pretty clear issue; there was almost a theorem-theorem-lemma feel to figuring out what had to be done, leading you to something like the actual reform we got. Yes, there should have been a public option. But the basic structure of the issue was clear.
That’s an unforeseen secondary effect waiting to happen.
In the body of the post Dr. Krugman lists six theories (which he refers to as doctrines, something that also fills me with dread) for explaining the 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
– 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
and goes on to analyze each at greater length. I note that regulatory capture does not even make a guest appearance.
How’s this for an explanation that doesn’t fit into Dr. Krugman’s doctrines? A lot of traders were doing exactly what you’d expect them to do which is pursuing the incentives they had and there was nobody at any level to stop them because everybody, e.g. managers, customers, rating agencies, and regulators, were also pursuing the incentives they had. If they won, they’d make billions. If they lost, somebody else would be left holding the bag.
How does pending legislation address that?