10 May 2010

"people and institutions thinking they are more wealthy than they are"

Marginal Revolution | Tyler Cowen | Simple thoughts on Europe

1. The fundamental cause of the financial crisis has been people and institutions thinking they are more wealthy than they are; this spread to Europe as well and now we are seeing the comeuppance.
The other ten points are interesting, but this is the one sentence prime mover of the brouhaha of the last two years. (And because of Cowen's ninth points ["This doesn't solve any of the basic fiscal problems, so ultimately it raises the stakes and creates a chance of even greater financial failure."] probably many years in the future as well.

Related: Fannie Mae seeks another $8.4 B from taxpayers after posting a 1Q loss of $13.1B. People are not as wealthy as the think they are, and that means they are not wealthy enough to purchase the sorts of houses they have been and — largely — continue to. The quicker we realize that and adjust our mental states the better.

~ ~ ~ ~ ~

I see a corollary to Cowen's points in the normalization of deviances. People (mortgagers, MBS traders, Greek finance ministers, eurocrats) did things that were ill-advised by all reasonable analysis. And yet Fate did not rear up and bite them on the ass, so they began to believe that the advice and analysis was wrong. These bad risks were seen as being safer and more acceptable, and even though no one could figure out why the analysis was wrong it was ignored. Then Fate got up from it's nap and ... well then we got something this:

Except unlike Columbia the debris field landed on everyone's heads and a bunch of governments decided that they were going to hand out steel umbrellas but only to the people who took the bad risks in the first place.  The end.

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