It appears to be a commonplace gaining ground every day that the main reason we have a credit crisis (about which I am not writing; this is an essay in recent monetary history) is that bankers created it, and specifically that they created it because they are stupid. Nicholas Taleb (who doesn’t eat foods unless they have a name in Hebrew or Doric Greek, I just bring this up as an interesting fact rather than to suggest that here’s a man who knows stupid when he sees it) has been really quite cutting on the subject, among others. Stupid, stupid stupid. Isn’t it a shame that these stupid people in their stupidity brought this crisis among us? Don’t we need a blue-ribbon commission to make sure that such stupids never have the chance to do so much damage again?
Remember yer Keynes. Macroeconomic events have macroeconomic explanations, not micro ones. Let us consider the following statements:
1) This was a policy-caused bubble. As I wrote last week, I noted in 2002 that the Federal Reserve, among others, was attempting to engineer a housing bubble in order to soften the landing post the internet bubble. This was not, I perhaps should have emphasised, a brilliant piece of iconoclastic contrarianism on my part. The jokes were quite original, and the Beanie Babies idea was all my own, but that actual analysis was totally commonplace at the time; I can’t remember if the Fed actually said this was what it was doing and suspect it didn’t, but it was generally and tacitly understood throughout the economic policy community that rising real estate prices were a goal of policy. Oliver Kamm remembers it this way too.
2) It was not even really a bubble, in much of the world. As Brad DeLong was writing in 2005 (as I say, this one really has to fall into the category of “mistakes we knew we were making”), there’s a more or less direct linkage between interest rates and house prices, via quasi-arbitrage between the rental yield and the bond yield, combined with downward-sticky nominal rents. In some parts of the world, the rental yield/bond yield spread got way out of equilibrium, but not in all of them; in Ireland, for example, house prices simply tracked the local government bond market all the way up, and then back down again.
From these two things, I conclude that a house price bubble was more or less unavoidable.
3) The other element of the crisis was “an excessive dependence on wholesale funding”. Again, at the level of the whole system, it could not have been otherwise. It can’t be put better than in John Hempton’s perfect phrase – “The banking system intermediates the current account deficit”.
Which is to say, that if you have a current account deficit, then domestic consumption exceeds domestic saving. Unless one’s prepared to assume unlikely things about the financial system, this means that the outstanding lending of the domestic banking system will grow faster than the outstanding deposits of the domestic banking system. If this continues for a long time, and in size, then the loans will exceed deposits, and this means that the domestic banking system, as a whole, will be reliant on wholesale market funding.
4) The reasons why the Anglosphere countries ran such large current account deficits over the last ten years are, frankly, not very well understood. There’s a variety of theories – the Ben Bernanke “global savings glut”, Melanie Phillips theory of “a crisis of morality and buy-it-now culture caused by Richard Dawkins” (what do you think I’m lying or something, the intentional undervaluation of Asian currencies, lots and lots of them. But nobody, so far, has come up with a theory under which the entire driving force of the world economy has been the stupidity of stupid bankers.
5) It is just about theoretically possible to imagine a world in which the banking system refused to intermediate the current account deficit, and did not respond to looser monetary policy by extending loans. But let’s get this straight – do you really want to go there? What we would be talking about here would be a world in which monetary policy did not work at all. If we lived in a world in which these far-sighted paragons of the imagination ran the banks, rather than the stupid stupids we have now, we would have smarted our way into constant recession.
Look, my basic point here is not to exonerate anyone or vice versa (apart from anything, that would stray into writing about the crisis itself, which I’m still not going to do). I am sure that at the levels of individual institutions, stupid things were done and irresponsible risks were taken. But likewise, I would also dare say that during the Great Depression, a lot of the workers who were made redundant were probably a little bit lazier and not quite as skilled or conscientious as the ones who kept their jobs. But if you were going to have your main comment about the Great Depression that it was the time when lots of lazy shirkers got the sackings they deserved, then I think everyone would agree that you’d kind of missed the big picture. The analysis that blames it on stupid bankers, is of a piece with the kind of analysis that regards the 1930s as being the decade when the working class of the world took it upon itself to have a great big shirk.
 I might actually be moved to argue that the internet bubble itself was at least partly a result of a soft-money policy aimed at smoothing the landing post the Asia/Russia crisis of 1998. There’s a real sense in which we’re still trying to complete the 1991-1995 monetary policy cycle, having had it interrupted three times already for the Mexico, Asia and dot com bailouts. Note also that Alan Greenspan’s “irrational exuberance” speech was made in 1996!
 Or at least, this linkage exists in Anglosphere (plus Spain, for some reason) markets, where housing behaves like an investment good, due to the existence of a large enough privately owned rental housing sector, plus easily available mortgage finance. In markets where housing behaves more like a consumption good it doesn’t. Commercial real estate behaves like this everywhere.
 I can sort of see how you might make a model of the economy which closed so that the exogenous factor was the desire of bank executives to get big bonuses and everything else followed from that. But it would be a very weird bass-ackwards post-Keynesian model, and I really don’t think anyone actually believes that this would be a good description of the world. Maybe I missed the memo and we all believe in endogenous money these days, but I have scoured the Nobel Laureates list up and down and Warren Mosler’s name is not on it, so I conclude otherwise.
 Can you hear that sound? Just faintly in the distance? It’s the sound of the tiniest violin in the world being played by someone who doesn’t care that it’s actually the Sveriges Riksbank Prize in Honour Of Alfred Nobel.
 This might actually be the kind of economy that Taleb would prefer, as it would afford limitless opportunities to sit at home, stroke our beards and sagely note that nobody really knew the nature of the risks one takes by getting out of bed. In a very dignified, aesthetic way.
 Except Nobel Laureate Edward Prescott, who actually does believe that the Great Depression was basically a decade-long shirk.
 deedle deedle deedle.