Forget about particular details for a moment, in conceptual terms what led so many financial institutions to take so much excess risk? Bob Frank addresses that question and here is my list of major factors: 1. Collective stupidity: A lot of Greeks believed in Zeus and a lot of people in 1938 thought Hitler would be good for Germany. They were just plain, flat out wrong. I'll also put "model error" under this heading. The ...

Via Craig Newmark:QUICK: If you imagine where things will go with Fannie and Freddie, and you think about the regulators, where were the regulators for what was happening, and can something like this be prevented from happening again? Mr. BUFFETT: Well, it's really an incredible case study in regulationbecause something called OFHEO was set up in 1992 by Congress, and the sole job of OFHEO was to watch over Fannie and Freddie, someone to watch ...

It is now on-line. Contributors include Armen Alchian, Gary Becker, Avinash Dixit, Claudia Goldin, Greg Mankiw, Paul Romer, Pete Boettke, Tyler Cowen, Bryan Caplan, Russ Roberts and many others. On another topic, from elsewhere, here is Arnold Kling on net worth certificates. And here is Russ Roberts on home prices. Here is Bill Easterly's Op-Ed on development and the crash.

One alternative is a "net worth certificate" program along the lines of what Congress enacted in the 1980s for the savings and loan industry. It was a big success and could work in the current climate. The FDIC resolved a $100 billion insolvency in the savings banks for a total cost of less than $2 billion.Here is more. Here is an FDIC summary of the program, under the heading "Other Resolution Alternatives." To the extent ...

Keith asks, as do others:I had been curious as to how this whole situation will effect the dollar...If you find the time, I would like to know or see the future of the dollar in this situation.Please note that I am a "buy and hold" guy, not a trader, and I am certainly not a currency trader. But I'll cover the dollar vs. the Euro. My inclination is to think the dollar will hold its ...

There is the O'Neill plan:His plan to deal with the crisis would start with a "discounted cash-flow analysis'' of distressed instruments that are clogging the financial system. The government would guarantee the assets, paring back the support as principal and interest payments were made, he said. "That should take care of the liquidity problem because if they have a government guarantee at a specified level they should trade just like cash,'' O'Neill said. Or the ...

They are a good outline to many events behind the current crisis; many of you have been writing to me and asking for background reading. Another of my colleagues, David Levy, just published this short piece (with Sandra Peart) on the ratings agencies and the idea of experts.

Foreign banks account for 80 percent of the financial system in Mexico, 51 percent in Peru, 29 percent in Chile and 22 percent in Brazil.Here is more on the general issue of international contagion.

(The fictional 18th century heroine, Moll Flanders, recognized that a high self-regard can be dangerous, arguing that women who believe themselves beautiful are easier to seduce: “If a young woman once thinks herself handsome, she never doubts the truth of any man that tells her he is in love with her; for she believes herself charming enough to captivate him, ’tis natural to expect the effects of it.”)Here is the link.

A few inattentive malcontents are complaining that I haven't stated my views. I have, but if you want them, or some of them, in one neat place, devoid of subtlety or explanation, here they are: 1. Glass-Steagall repeal was not a major cause of the financial crisis, nor was government-induced "minority lending." 2. We should use regulation to move more of the currently unregulated derivatives markets to the clearinghouse model. 3. The crisis represents a ...

The best case scenario: The bad banks continue to be bought up, there is no run on hedge funds next Tuesday, only mid-sized European banks fail, money market funds keep on buying commercial paper, and the Fed and Treasury continue to operate on a case-by-case basis. Since Congress doesn't have to vote for something called "a bailout," it can give Paulson and Bernanke more operational freedom than they would have otherwise had. The American economy ...

Much like John McCain, Rudy Giuliani, who accompanied the presidential candidate on a campaign plane earlier today, is very interested in what happens with the government's bailout plan. That's because his law firm, Bracewell & Giuliani, is letting potential clients know it can best steer them--with its new Task Force-- to deal with the bailout.See the photo and press release, which says this:Mr. Giuliani noted that the Bracewell Task Force includes a former Comptroller of ...

Yes economists study this too:We use the workplace experiences of transgender people – individuals who change their gender typically with hormone therapy and surgery – to provide new insights into the long-standing question of what role gender plays in shaping workplace outcomes. Using an original survey of male-to-female and female-to-male transgender people, we document the earnings and employment experiences of transgender people before and after their gender transitions. We find that while transgender people have ...

Kashyap, Rajan, and Stein have lots of explanation but here is the initial bottom line:The proximate cause of the credit crisis (as distinct from the housing crisis) was the interplay between two choices made by banks. First, substantial amounts of mortgage-backed securities with exposure to subprime risk were kepton bank balance sheets even though the “originate and distribute” model of securitization that many banks ostensibly followed was supposed to transfer risk to those institutions better ...

Will Congress approve a bail-out package for banks before September 30? Right now the contract is selling at about 79, which usually translates roughly into a 79 percent chance of approval. Note however that the marginal utility of money here does differ across worldstates. Assume that the marginal utility of money is higher (people are poorer) with no bail-out. That makes some people want to bet against the bail-out as a form of insurance, thereby ...

I thought the original Paulson plan was terrible with regard to rule of law, and in that sense I thought the equity stake idea of Dodd was better. A modified Paulson plan might be as good, it is hard to say. [Eric now blogs that the Dodd plan gives the Treasury more power than current versions of the Paulson plan. His post is very important.]In reality I expect that either the Paulson or the Dodd ...

...the CDS [credit default swap] positions of large US banks during 2001–06 grew at an average compounding annual rate of over 80%.That's from a very good paper by Darrell Duffie. There is more: Of all 5,700 banks reporting to the US Federal Reserve System, however, only about 40 showed CDS trading activity and three banks – JP Morgan Chase, Citigroup and Bank of America – accounted for most of that activity.The net transfer of credit ...

According to the study...almost one in two voters in Karnataka, where assembly elections were held in May, had taken money for voting or not voting. However, the share of voters is higher among the voters in the so-called below the poverty line, or BPL, category: 73% in Karnataka while the national average is 37%.And the price?“The bribe money varies from state to state. It may be Rs100-150 (a voter) in some states and it can ...

Be wary when you hear talk of "derivatives" without further qualification. They fall into three quite distinct categories: exchange-traded, over the counter (OTC), and swaps. Here is the best overall paper I know on that division. Wikipedia is useful as well. I'll cover swaps in a separate post soon, so for now let's set those aside. Exchange-traded derivatives include the instruments traded at the Chicago Mercantile Exchange and The New York Stock Exchange. Their regulation ...

It's always worth hearing from both sides, in this case Nadav Manham:This [the purchases of the Paulson plan] has the effect of modestly increasing the stated book value of these financial institutions. More importantly, with the toxic waste off the books, it improves the likelihood that an outside investor--Treasury itself, a sovereign wealth fund, even our man in Omaha--now feels able to value the enterprise. Hold your nose and admit it: the relatively few franchises ...