At the center of this crisis was a bubble in risk-taking. The risk premiums dropped off the cosmic scale, the lowest ever recorded. On our seven-year forecast data, we reckoned that between June of '06 and June of '07, people were actually paying for the privilege of taking risk.
--Jeremy Grantham, chairman of institutional money manager GMO in Boston, in this week's Barrons
Billn: This is of course an interesting perspective. That said, so what? You can't put "risk" in jail. Well, there were a lot of individual people at fault, from the rating agencies, to the SEC, to the investment banks, to the media. Why the media? No reporting on the risk bubble, particularly the CDS bubble which by itself should have sent people screaming from the mountain tops. I found out about it earlier in 2008 when it was reputed to be nominally $45T in size. Now, it's somewhere between $60-70T. 5-6 times the GDP! Everyone is at fault.
The disturbing thing is that the everyone who is at fault, including, prominently, the CEO's and other leaders of the aforesaid agencies, companies, and institutions, put their heads in the sand. There were a few people worrying about this publically (Grantham - Read Barrons - was one). But for the most part, nada.
As a recovering republican, I am straining at the bit to blame Bush 2. And, there certainly is a truly large amount of blame there. Bush 2 created an atmosphere where there was no possible avenue for regulatory reform. Would a Clinton-like administration have done better? I would like to think so, but we will never know.
But, as I have said before, we have a mechanism in place to "fix" this type of situation. It is called the law. Creating laws which deal with possibly new, creative type of abuse is a thankless but so necessary part of our on-going duty as citizens (we of course act through our representatives). The executive's duty is to enforce the law. If there are well-though-out laws against the things which create shadow banking system, those things won't be done. Some other bad thing will be done at some point. Then, laws against the new problems need to be created and enforced. It's the adult, responsible way to run the world. We should not abandon the process because a particular law is not working. Fix it!
Maybe this crisis will somehow create a regime which makes it possible for legislators to actually address problems, and be less idealistic. That hope sustains me for at least the rest of the week, on the other hand, maybe i'm being too idealistic...