Our friend Larry White chimes in with some poignant comments on Lehman, the credit markets, etc.:
On campus this afternoon I overheard the following remark by a non-economist, trying to explain to another non-economist the Lehman failure and today’s stock market decline: “It’s a combination of deregulation and greed. Boy, if you deregulate enough, the greed will follow.”
If I had butted in, I would have made two points. (1) If an unusually large number of airplanes crash during a given week, do you blame gravity? No. Greed, like gravity, is a constant. It can’t explain why the number of crashes is higher than usual. (2) What deregulation have we had in the last decade? Please tell me. On the contrary, we’ve had a strengthening of the Community Reinvestment Act, which has encouraged banks to make mortgage loans to borrowers who previously would have been rejected as non-creditworthy. And we’ve had the imposition of Basel II capital requirements, which have encouraged banks to game the accounting system through quasi-off-balance-sheet vehicles, unhelpfully reducing balance sheet transparency.