They list 26 things that led to the crisis. Twenty six things and the same people in Congress who asked for and obtained this backward looking report never saw one of them in the past two years or even more!
This is like a patient arriving in your office who is morbidly obese, with a three pack a day habit for thirty years, who lives a rather profligate life, also does crack, and then presents with small cell lung carcinoma, renal failure, has an MI on the table, and well you get the point. These problems were a long time coming. You could see the weight gain, you could smell the cigarette smoke, you could see the drug use in the eyes, and on and on. It was more than just a light at the end of the tunnel and finding out it was the train.
These 26 causes as seen by CRS are:
1. Imprudent Mortgage Lending
2. Housing Bubble
3. Global Imbalances
4. Securitization
5. Lack of Transparency and Accountability in Mortgage Finance
6. Rating Agencies
7. Mark‐to‐market Accounting
8. Deregulatory Legislation
9. Shadow Banking System
10. Non‐Bank Runs
11. Off‐Balance Sheet Finance
12. Government‐ Mandated Subprime Lending
13. Failure of Risk Management Systems
14. Financial Innovation
15. Complexity
16. Human Frailty
17. Bad Computer Models
18. Excessive Leverage
19. Relaxed Regulation of Leverage
20. Credit Default Swaps (CDS)
21. Over‐the‐Counter Derivatives
22. Fragmented Regulation
23. No Systemic Risk Regulator
24. Short‐term Incentives
25. Tail Risk
26. Black Swan Theory
This is worth the read. Each of these has in some way been accused as being the dominant element in the crisis. Each has its advocate and in a way it was the perfect storm. Could this have come about with only one of these, how about two, maybe three, or do we need all 26. The following chart depicts a possible cause and effect relationship amongst these causes. That is there were early causes and causes of causes. This means that there were canaries that were dying off well before the ultimate deaths.
Some of the causes are derivative of the others and some are just ways of rephrasing one or a few of the others. The Black Swan theory of Taleeb is an artifact that sells well, but it is the generally accepted Court Jester theory of evolution, also the one phrased by Eldredge and Gould and known as punctuated equilibrium. Simply changes occur when major events disrupt equilibrium. The direction of the change in a Darwinian sense in towards the survival of the fittest. However in an economic sense, the fittest may or may not be to those in power. Things happen that tend to disturb what we would commonly look towards as the fittest.
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