This Frontline documentary is worth watching to try to understand what they got right and what they got wrong in explaining the financial crisis. My comment on the film below.
“The summation of four episodes is that unrestrained greed is the primary explanation of the financial crisis and the solution is regulation. This is not only unsatisfying, it just can’t be. Greed is a constant of human nature, and so, that nature cannot explain bad outcomes vs. good outcomes. Sadly to say, it is not the greedy bankers who are to blame, but the enablers of greed. And it is folly to think we can regulate human greed with rules and enforcers – that’s just not how human societies are organized. Constraints on human behavior are predominantly imposed internally – in other words we learn to control ourselves. Society can impose boundaries to enforce self-discipline. In politics the institution is democracy and constitutions. With religious morality the boundaries are set by Heaven and Hell. And in finance and economics the boundaries are set by the consequences of failure, which is loss. We removed these consequences from finance, so unrestrained risk-taking with socialized losses is what we got. Look to the governments and regulatory agencies if you want to find the true culprits.
“To relate this analysis to unfolding events, the watershed moment was the bank bailout. Geithner was/is wrong and Summers and Romer were right. Obama made the wrong choice and suffers for it to this day. Geithner did NOT save the financial system, he saved the status quo – there’s a big difference. We needed to reward good behavior and punish bad behavior – that’s the only way free market capitalism can work. Obama missed his opportunity and he will not get another because at the moment of the bailout he had enormous leverage over the banking industry. That has been lost and the banks now influence the political process with impunity.
“The shame is that to avoid the ups and downs of the economic cycle, with unemployment and business downturns, we turned finance into a casino by pumping the system with money every time it stalled. Ultimate blame lies with the Fed, which never took away the punch bowl and thereby leveraged globalization to unsustainable levels. We will be feeling the debt and credit hangover for a very, very long time and the losses will be spread unequally and unfairly.”