I love the sport of trying to figure out what caused the financial crisis- the theories and the research in the hope/ idea that we could make it not happen again. Paul Krugman starts off his op-ed about the financial crisis with this little ditty:

“Everyone has a theory about the financial crisis. These theories range from the absurd to the plausible — from claims that liberal Democrats somehow forced banks to lend to the undeserving poor (even though Republicans controlled Congress) to the belief that exotic financial instruments fostered confusion and fraud. But what do we really know?”

So, which parts are absurd and which parts are credible?

Liberal Democrats forced banks to lend to poor:

Mmmm, probably more absurd than plausible. Though, the truth may be somewhere in between. The American Dream rotates around a few axes- equal rights for all, the ability to move up based on merit, and the idea that anyone and everyone can raise a family in relative security. At least two of those, moving up and raising a family, involved a house. For generations we’ve been promising, whether explicitly or implicitly, that people could have a house if they want to. So people grow up wanting and expecting a house. Then we have been growing in the financial markets for decades- probably two generations since the early 70’s haven’t seen any real financial hard times. Only economic growth. So people expect that. And they expect to move up. And they expect Wall Street to be greedy. So, the folks who work on Wall Street grew up expecting to be greedy to move up and get what they want, and they subliminally thought justifying it to themselves by saying that they would help get poor people into homes would make it more palatable and ok. Maybe?

I’m probably making that all up. Democrats didn’t force any bankers to do anything. If there’s one lesson we can take from the last year of the health care reform effort, it’s that the Democrats aren’t very good at forcing anyone to do anything. I’d be psyched if they could force themselves to pass a bill based on a core belief of the Left.

And then there’s Exotic financial instruments creating confusion and fraud.

I call bull. I remember vividly sitting down to eat some pizza one night and reading a magazine article about computer algorithms that would buy and sell for hedge funds based on crazy analysis factors. Those blew my mind, but I was teaching English, not trading stocks. And they got programmed, you know? It’s not like the computers made them up. And if they were working, then they were programmed well, as in, by people who understood the market well enough to write a program to do their trading for them. Did it throw off the market? Probably. Do I think that Wall Street traders suddenly didn’t understand derivatives and other kinds of swaps and trading tools? Ummm, no. That’s basically their job. If they didn’t understand the tool, they trusted someone who did understand it. There aren’t that many folks on Wall Street. A friend of mine is a hedge fund accountant. He understands that stuff. It’s not rocket science. Not plausible.

In the end, we all just made bad decisions and acted greedy. Now,? We pay.

Photo Credit: Steve Wampler (via Flickr under CCL)