It seems to be a human trait to expect and to seek out singular causes of complex social phenomena. The credit crunch is a case in point. It has been variously blamed on Ronald Reagan, Bill Clinton, Phil Gramm, Fernand St. Germain, George W. Bush, Alan Greenspan, Barney Frank, narcissistic and greedy bankers, and stupid or mendacious borrowers. It is all of the above and more.
Hunt the ‘perp’ is popular. Nobel Laureate Paul Krugman says it was all Ronald Reagan’s fault. In 1982 he signed a bill that began the slippery slope to financial deregulation and encouraged a huge rise in private debt along with rapid increase in government debt. Bill Fleckenstein disagrees. He blames legislation introduced by Congressman St. Germain to increase FDIC insurance coverage the year before Reagan became president. Fleckstein also likes Greenspan for the crunch because he played too loose with the money supply. Senator Gramm is the culprit for some because he sponsored the repeal of the Glass-Steagall Act in 1999. But that was on Bill Clinton’s watch so it was really his fault (Republicans pushed the bill through but enough Democrats joined the final vote for a veto-proof majority). Barney Frank (and most other Congresspersons) relaxed the regulation on Fanny and Freddie to make home ownership more affordable to more Americans. Then there were the mortgage brokers selling crappy loans to stupid borrowers and the bankers who sliced and diced them through their fallacious computer models and sold them to unsuspecting investors with the imprimatur of security from the rating agencies. There is plenty of blame to go around. Why choose?
There is no way to sufficiently regulate a complex system to prevent stupid, greedy, or dishonest people from gaming it. And because the system is complex it cannot be “modeled” with any accuracy or sufficiently comprehended for government to ensure that it will never run amok and hop into a different phase state, like a massive destruction of credit and failure of trust. We may all wish Goldman Sachs executives serious bodily harm for using government money and guarantees to profit from the crisis. But it is probably not feasible to prevent slick operators from winning unspeakable wealth even if the economy collapses back to 18th Century levels.
Americans like to pick sides and root for winners but in this game we are all losers. Losers because we lost wealth or a job, or lied on a loan application, or bought a house too big. They are losers too who fail to recognize social criminals when they look in the mirror to adjust their silk tie and brush dust off their hand-made suit. All those who contributed over decades to the recent crisis—from the White House to the poor house, from Congress to Wall Street—are losers because they refuse to admit their role and point the finger at some other player. In this game, everyone can lose something; if not wealth, a clean conscience, integrity, or the trust of the people. Because the game itself is risky; that is the nature of the emergent capitalist market system that is too complex to control.
There is another lesson from this saga. Ideas are dangerous; bigger ideas are more dangerous. The Reaganesque idea that government is the problem and the market is the solution assumes too much. First, it is based on a form of economics that assumes that people are rational. However, I have never met a fully rational person and they seem to be least rational when they fall in love with a house or a high yielding investment. Second, it assumes that complex financial systems are self-stabilizing. Yet, observation of ecological systems shows that while they may be stable for a long-period, a small external disturbance can quickly lead to destruction. Economic systems suffer many external disturbances, primarily from politics, especially when politicians believe in (often unproven) radical ideas.