The Nub of the Matter?

From Brad DeLong:

The key irrationality [causing the present crisis] was a private-sector failure on the part of the shareholders and top managements of the banks to make sure that their traders had an appropriate stake in the long-run survival of the bank and not just in constructing a portfolio that would be marked-to-market at a high valuation on Dec. 31. And the government needs, for all our sakes, to compensate for this private-sector irrationality.

That’s the conclusion of a very interesting argument.

2 thoughts on “The Nub of the Matter?

  1. But the private sector, for example, did not create two government-backed behemoths which bought up half of the mortgages issued in the entire country with no questions asked. Neither did the private sector prevent itself from expanding if it failed to issue mortgages to designated groups of people unlikely to have the wherewithal to pay back those mortgages.

    It was, perhaps, regrettable, but certainly not irrational behavior on the part of the private sector to have attempted to profit in the climate and amidst the regulations the government had created. Mr. Delong’s arguments are just run-of-the-mill anti-free market revisionism. A genre he excels in.

  2. Irrationality is a convenient argument, but not the Nub of Matter. Why would this irrationality exist.

    Craig Howard gets closer to the nub. Also, everyone from the borrowers to Barney Frank had too much faith in “science” of splitting the crud up.