Erza Klein looked at the system via Michael Lewis’s new book. First, those labeling mortgage bonds with “AAA” status, thinking each were individual items. Problem was: One the introductory lending rate ended and the real rate kicked in, these bonds became time bombs as the homeowners started defaulting. Then came the bankers for selling and stockpiling these bonds with no obvious knowledge how they behaved. The act was complete short-term. Then there were the homeowners themselves. They got suckered into things far above their pay-grade with the predatory lending scheme the bankers advertised.
Klein soundly concluded:
In this case, it’s not that there’s plenty of blame to go around. It’s that there’s too much blame to go around. There is not one single piece of the system that worked the way it was supposed to. Consumers did not make smart decisions, nor did banks or ratings agencies or institutional investors or regulators. Everything failed. And that caught us unprepared, because in the run-up to the crisis, we’d looked at these people and pronounced them geniuses. Alan Greenspan, who we’d nicknamed “the Oracle.” The titans of Wall Street, who had so much more money than we did that it seemed obvious they knew something we didn’t. The banks, which were staffed with the best of the Ivy Leagues.
The system simply failed because at every level, not a single smart man stood up. And none to be found. They all bit the baits and deluded themselves that (1) they knew what they were doing and (2) should they fail, someone else will come and pick up the pieces.
But the existence of seemingly endless idiots at every level of the financial system is much more important than the frustration of a small handful of clear-eyed doomsayers. Like the poor, idiots will always be with us. In fact, we’ll frequently be among them. The seductions of group-think, the tendency to trust experts, the incentives for employees to go along with their bosses rather than contradict them and the need to deliver short-term profits even at the cost of long-term risk are more powerful than any regulation and will exist long after the visceral lessons of the subprime meltdown are gone.
So we’re left where Summers started: There are idiots. And if you look around, it turns out that they’re everywhere: In the banks, at the Federal Reserve, running the rating agencies, and selling mortgages. You can’t idiot-proof a system run by idiots.
And to boot: Wall Street is resisting the changes needed to up the standard of their practices. What more idiotic than that?
