Recommended Reading on the Financial Crisis
By Arnold Kling
Just for fun, Felix Salmon’s take on Citicorp management. I would make a similar criticism of the Freddie Mac CEO during the 2003-2008 period. But from the larger systemic perspective, is bad management really an exogenous variable? Or is it inevitable in a bubble that bad managers will find their way to firms and, more importantly, that in a bubble bad managers will be given much more leeway to do dangerous things?
Also, recommended by Greg Mankiw are two valuable papers, one by Baily, Litan, and Johnson and the other by Hall and Woodward. The latter ask why the problems of asymmetric information and principal-agent problems were so fatal in this instance.
If capitalism could not solve this general type of problem, capitalism would not be viable. While there does appear to be irresponsibility at nearly all levels of the subprime mess, similar chains of responsibility in the prime mortgage market were present since the creation of Ginnie Mae in 1968, and have operated successfully. The subprime failure is unique.
All products involve chains of responsibility. A supplier of crankshafts to Toyota cannot provide shoddy goods just because a failed crankshaft becomes Toyota’s problem, And Toyota cannot ignore the problem because it falls on the owner of a Toyota.
I think that the way that capitalism wants to solve the problem of mortgage securitization is to stop doing it. My conjecture is that if there were a level regulatory playing field, then old-fashioned mortgage lending would win and securitization would lose.