A disaster as big as the housing meltdown and credit crisis isn’t cause by just one thing. For one thing, the disaster itself wasn’t even one thing, it was two, the housing meltdown and the credit crisis, so it’s unlikely that only one thing caused both calamities.
People look for a single cause, for that one loose end of the ball of yarn that led to the whole thing unfurling, because it’s then easier to assign blame. Of course, much like there wasn’t one cause, there isn’t one culprit, although some loom larger than other.
There were at least three main causes of our current ailments, and three secondary causes, and then a number of coincident causes, as Barry Ritholtz makes clear today. “The reality of crisis causation is far more complex and nuanced,” he writes. He distills the prime causes from the coincident ones.
The idea is to ferret out the “but for’s” — the problems but for which other problems would not have come about — from coincident causes, some of which are being propagated as the real causes by the ” ‘it’s all Fannie’s fault!’ crew,” he says. “By muddying the waters, they hope to avoid retribution for their own roles in what occurred. As the mid-term election approaches, we should expect to hear more from this crowd.”
The whole post is worth reading, but to distill it down, here are his three prime causes:
1) Ultra low rates;
2) Unregulated, non bank, subprime lenders;
3) Ratings agencies slapping AAA on junk paper.
The next three, secondary causes are:
1) The Commodity Futures Modernization Act of 2000
2) Net Cap Rule Change of 2004 (aka Bear Stearns exemption)
3) Repeal of Glass Steagall (1998)
That’s six, if you’re counting at home, which illustrates just how complex and deep the problems were that led to our current state.
The downside of that is because there are so many causes, the ultimate solution to those problems, and the unwinding of them, is going to be a long and ongoing process, one that can’t be solved merely by a purportedly self-correcting and temporary slide in stock or house prices.
Raymond Haines
February 3, 2010
It’s a pretty well thought out diagnosis, as given by BR over at Big Picture, and summarized here. And a good presumption that it won’t be solved with one quick fix or allowing time to run it’s course on asset values. But I think time without additional government-led damage can correct the problems. However, it’s naive to think that more wrenches won’t be thrown into the mechanism, especially with the propensity to meddle that this Administration seems to have. The ultimate test will be in 12 months, as to whether or not we slide back into full on recession or worse. And of course, if unemployment comes back to a level of 8.0% or less, then the pols will think they have conquered our econ problems.