Arnold ably identifies two main narratives about the 2008 financial crisis.  But he neglects the simplest narrative of all: Once in a century, a once-in-a-century mistake happens.  The end.

I know the simplest narrative is unsatisfying.  Nevertheless, it’s less unsatisfying than any other narrative I’ve heard.  No matter how much detail the other narratives provide, they can’t explain the crash of 2008 without tacking on the assumption that, “Hardly anyone figured this out until disaster struck.” 

I don’t doubt that lots of people in finance and government had perverse incentives and acted on them.  But without a once-in-a-century mistake, this perversity would have been gradually built into asset prices as it developed, not ignored, then suddenly noticed over the span of a few days in 2008.

Until someone comes up with something better, then, I’m sticking with the simplest narrative.  Despite its defects, it still beats the competition hands down.