We’ve gotten a fair amount of criticism over on our latest Baseline Scenario post for not correctly identifying the causes of the financial crisis. I understand the criticism that we don’t identify the one single, crucial cause, because historical events like this are always overdetermined: there are always multiple plausible explanations, and with a sample size of one there’s no way to know which explanation is correct. (It reminds me a key issue in torts, where you distinguish between cause-in-fact and proximate cause … well, never mind. It’s a fascinating subject, but a bit off-topic here.)
Anyway, luckily for all of us, today’s G20 communique reveals the “Root Causes of the Current Crisis.” In case you missed it:
(I’ve inserted my own numbers to count what I consider separate causes, as opposed to descriptions of what happened.)
During a period of strong global growth, growing capital flows, and prolonged stability earlier this decade, market participants sought higher yields without an adequate appreciation of the risks and (1) failed to exercise proper due diligence. At the same time, (2) weak underwriting standards, (3) unsound risk management practices, (4) increasingly complex and opaque financial products, and (5) consequent excessive leverage combined to create vulnerabilities in the system. (6) Policy-makers, regulators and supervisors, in some advanced countries, did not adequately appreciate and address the risks building up in financial markets, keep pace with financial innovation, or take into account the systemic ramifications of domestic regulatory actions.
Major underlying factors to the current situation were, among others, (7) inconsistent and insufficiently coordinated macroeconomic policies, (8) inadequate structural reforms, which led to unsustainable global macroeconomic outcomes. These developments, together, contributed to excesses and ultimately resulted in severe market disruption.
- Naive investors
- Naive underwriters
- Bad risk managers
- Complex financial products
- Insufficient domestic regulation (note the lovely phrase “in some advanced countries,” enabling everyone to point at someone else)
- Insufficient global coordination
- Insufficient global regulation
There you go.
(We’ll have a more comprehensive review of the G20 meeting, probably later on Sunday.)