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The three fundamental factors behind the financial crisis have been 1) an enormous growth in wealth that needed to be moved into investmentsweak governance and oversight, 2) the greater willingness of both individuals and financial institutions to take on risk, and 3) weak governance and oversight, with a blindness to new forms of systematic risk. All three were needed to bring about the scope of the current mess — so that means we’ve had some very bad luck on top of everything else.
We've already been through a savings and loan crisis, a junk bond crisis and a dot-com bubble, but today’s crisis is by far the worst of the lot — and will probably prove to be more than just a bump in the road. We can do better the next time around, but we have to start by seeing that the current failure is far-reaching and that we can blame many different things and many different people.
The real problem is not some particular villain but rather the very fact that we cannot help but put the evaluation of risk into all-too-human hands.
~Tyler Cowen in today's NYTimes