Explanations for the crisis – part 93

For those wanting to see an anti-statist explanation of the crisis this is an interesting essay by Lawrence White, a professor of economic history at the University of Missouri, St Louis on Cato Unbound. While Joseph Stiglitz blamed the crisis on insufficient state intervention (see December 9 post) White does the opposite.

White argues there were two main ways in which action by the federal authorities caused the crisis:

“We can group most of the unfortunate policies under two main headings: (1) Federal Reserve credit expansion that provided the means for unsustainable mortgage financing, and (2) mandates and subsidies to write riskier mortgages. The enumeration of regrettable policies here is by no means exhaustive.”

Although there is some truth in his argument it is ultimately flawed. The federal authorities did bolster the economic with a substantial credit expansion. However, they were in turn responding to a chronically sluggish economy. While federal action did play a role in inflating the credit bubble it was not the fundamental cause of the problems.

There is also a rejoinder to White’s essay by J Bradford DeLong of the University of California, Berkeley. He prefers an explanation that focuses on the frailty of human psychology:

“the road that starts from investigating how human psychological limits lead to bad private-sector contract design that then magnifies psychological biases.”

Explaining a specific form of crisis in terms of timeless human weaknesses does not seem convincing to me either.