Pointing Sticky Fingers

I'll fess up: I don't know what caused the current financial crisis. I do suspect, though, that the proximate and ultimate causes are much more varied than many people who are pointing fingers now would like to believe. Megan McArdle sums it up:

This brings me to a pet peeve that has been increasingly irritating me as the crisis wears on: people with little or no understanding of markets confidently opining on the causes of the crisis. Funnily enough, the cause of the crisis is always exactly what they happened to be against before the crisis happened, and the solution is for the people they disagree with to be banned from polite society and exiled from the political process. (Emphasis added)

She is of course then pilloried by her readers for not having all the answers. And for suggesting that people who didn't know what a credit default swap was 3 months ago probably shouldn't be deciding what caused the semi-collapse of a extremely complicated financial system (that professionals within the industry admit they don't completely understand). The progressives are blaming the free market, "American-style capitalism" (whatever that means), and Wall Street's horrendous misunderstanding of risk. The conservatives are blaming the government-sponsored enterprises of Fannie and Freddie and the various government policies enacted to promote home ownership. And some people (myself included) are saying that a bunch of people shouldn't have taken out mortgages for 4,000 square foot homes they couldn't really afford or leveraged these homes to make investments under the ussumption that they "hey, real estate will always go up in value!" All of these played a role in the current situation, and to pin it on one because it supports your ideology isn't going to help us figure this out or avoid it in the future.

I'll tell you one thing we don't need more people putting the blame on, though: greed. This is the equivalent of saying that a bridge collapse was caused by gravity. I know "greed" is going to play a role in the situation, because it plays a role in every economic action taken by human beings. Bringing up a constant is unhelpful in explaining how a situation arose. Putting the blame on "greed" does us no benefit moving forward, because I'm pretty sure the next set of bankers, home buyers, and government officials will be just as greedy these ones were. And they were in the late, great 1950's, too, when everything was wonderful, houses where white, lawns were green, and teenagers respected their parents. The mortage lenders get criticised for being "greedy" in taking loans from lower-income people who were poor credit risks. And if they had rejected these loans, citing the risk of default?... They'd be accussed of being greedy. So they can't win. Either way, they are trying to maximize profits, which is their job. I'm not interested in the greed part of it, because it does not help us understand this situation or avoid similar catastrophes in the future. What we need are institutions and models that understand that people are greedy and take it into account when predicting how people will behave and what the effects of economic decisions will be. Greed is a useful scapegoat for presidential candidates, but it pretty useless in making any real progress.