The Regulators' Cognitive Failure
By Arnold Kling
The Fed’s failure to foresee the crisis or to require adequate safeguards happened in part because it did not understand the risks that banks were taking, according to documents and interviews with more than three dozen current and former government officials, bank executives and regulatory experts.
I would add that the suits at the banks did not really understand the risks they were taking, either. This is a key point of the first chapter of Unchecked and Unbalanced. Where there was power, there was not knowledge. The concentration of power in an age of dispersed knowledge is what the book is trying to highlight and to combat.
Read the whole story. My favorite anecdote concerns a colloquy between Ben Bernanke and Richard Dekaser, a bank economist who worried about house prices in California in 2005.
“They have been saying that about California since I bought my first house in 1979,” Bernanke replied.