mathgeek

Eight Mistakes That Caused the Financial Crisis

I think Blinder is pretty close

Derivatives:

I think the problem is not some vague need for regulation, but rather to ensure that complex structures not be used to arbitrage away from basic princples... in other words, if it looks like a duck, and quacks like a duck, it should be subject to the same regulations as a duck... this point goes far beyond just derivatives per se, but a host of alternative structures (SIVs,auction rate securities... even money market funds) who's basic purpose is to avoid capital rules.

Leverage:

Excess leverage is clearly one of the greatest core causes... and for the most part it isn't leverage of commerical banks, but the leverage of a variety of other financial participants... particularly investment banks but also hedge funds and others... the real core banking problem is supplying excess leverage. Hedge funds can and should be able to lose as much as they want... of their own money. The most shocking regulatory failure will ultimately allowing banks to lend hedge funds 90% of their capital (or more) with relatively modest capital requirements for the lending bank.

Subprime:

I think painting subprime lending with such a broad brush is a mistake, and we lose sight of the core issue, which was that subprime and alt-a mortgage lending stopped worrying about capacity to repay. One of dark secrets of this business at its worse is that lenders were basically harvesting fees from people by repeatedly refinancing, eating away at equity in home... knowing that the borrower could not repay out of their income, but depending on the fact that they could... and did... refinance, over and over again. While not as cynical, it also allowed for mortgage originators to profit from house flipping at the hight of the boom... essentially providing bridge financing to house flippers, in the guise of a mortgage loan. The bottom line is, there is a good reason why capacity to repay is an important mortgage underwriting criteria... as the owners of these loans are re-discovering to their anguish.

Forclosures

Limiting forclosures was a missed opportunity, but perhaps not in the way suggested. Simple minded approaches would have either failed or created worse problems; Nonetheless, it is a fair point that there are structural issues that could have been addressed. There are structural reasons why mortgage servicers foreclose and sell (even at distressed prices) when it might be more economically rational to take a different action (work-out mortgage, convert to rental, etc.). This is mostly a case of what is rational in normal circumstances becoming collectively irrational, but with no system or structure in place, there is no way to change the "normal" course of action to something that makes more sense... especially since doing something different requires a re-negotiation of who bears how much of the economic loss that has occured.

Lehman

Yes.

TARP

It was a good decision to inject capital rather than buy bad assets... this creates a multiplier effect that gives more "bang for the buck"... it would have been ideal if this was done with stronger incentives to lend, however.

Hopefully the remainder of the TARP funds will be used effectively to buy up bad assets. The devil has always been in the details... what valuation to place on what the government buys, and given that the quantity of bad assets out there is far greater than the funds available... how to deterimine which assets to buy become sticky questions for which there are no easy answers... which is almost certainly part of the reason that the Bush administration chose to leave the inevitably controversial decisions to the Obama white house.