Pre-Dawn Elephant Groping

This month's Cato Unbound, “What Happened: Anatomies of the Financial Crisis,” is devoted to digging in and getting the real story. We tapped four economists with four very different perspectives. So far, we've heard from three of them, and the fact that each has said such radically different things is both frustrating and illuminating. Larry White says the trouble we're in was caused by a profligate Fed and government policies that encouraged bad home loans.  Bill Black says a lack of regulation left executives with the incentive to maximize short-term profits and capture big bonuses, basically defrauding creditors and shareholders. Casey Mulligan wants to explain the housing boom and bust, and thinks it was based in consumer/investor expectations about future returns to homeownership, not in supply, demand, or subsidies during the boom. But so far, he says, we don't know enough to say whether those expectations were rational — based in reasonable-but-innacurate predictions about changes in preferences or technologies — or were irrationally exuberant. So we don't yet know what to do about it.

Brad Delong will have his say on Monday. At this point, I'm hoping he doesn't agree with any of the previous essayists, so that we can go into the informal discussion part of the issue with total dissensus. But since these guys are all surely hyper-rational Bayesian updaters, we're bound to have perfect convergence by the end of the blog chat. Surely! But, seriously folks, I'm personally left with the sense that White, Black, and Mulligan (who should be named Gray) are all on to deeply important aspects of the One True Explanation of the financial crisis. The sun will soon rise and we'll see this thing in the light. And we'll laugh. Because elephants are morose, yet humorous.