They are a good outline to many events behind the current crisis; many of you have been writing to me and asking for background reading.

Another of my colleagues, David Levy, just published this short piece (with Sandra Peart) on the ratings agencies and the idea of experts.

R: "I’m quite pessimistic about the current financial system.  I’ve been buying gold."

A: "Gold?  That’s not pessimistic enough.  I’ve been buying rice."

A few inattentive malcontents are complaining that I haven’t stated my views.  I have, but if you want them, or some of them, in one neat place, devoid of subtlety or explanation, here they are:

1. Glass-Steagall repeal was not a major cause of the financial crisis, nor was government-induced "minority lending."

2. We should use regulation to move more of the currently unregulated derivatives markets to the clearinghouse model.

3. The crisis represents a massive conjunction of both market and governmental failure.

4. I would not nationalize banks as ongoing concerns, at least not short of a far more extreme emergency than the current status quo.

5. The modified Paulson plan was better than nothing — especially after the market had been scared — but far from my first choice.  In any case the plan would have been revised almost immediately.  The Paulson and Dodd plans were never that far apart.

6. My first choice is to induce and if need be to force more information revelation, identify the insolvent banks, close them up, and give the battle-tested FDIC a much greater role in the whole process.

7. In the meantime the Fed should not worry much about inflation.

8. The critical deregulatory mistake was allowing excess leverage.  Many deregulations get blamed but in fact contributed little to the problem.

9. Everyone says that letting Lehman die was a big mistake but I’m not yet convinced.  Maybe a bracingly high TED spread is what we need.

10. Libertarians are overrating the moral hazard argument, as many equity holders have been wiped out.

11. If someone is pushing conclusions and not identifying the potential weak points in his or her arguments, be suspicious.  Also beware of anyone pretending to offer you simple answers.

12. I have a long and complicated view on the relevance of Austrian Business Cycle Theory which resists easy summation, but markets could have and should have been more cautious in response to Greenspan’s easy money policies.

13. Insolvent hedge funds and the commercial paper market remain outstanding issues which are not easy to address.

14. I agree with Arnold Kling about relaxing capital requirements though at this point I don’t expect it to help much.

15. The crisis is complex and has many causes; there won’t be a simple or quick solution.

If you wish you can google to the details.  Also, I don’t believe I had offered #9 before on this blog.

Many of you like this series and I am no longer puzzled as to why.  The countercyclical assets in recent times are A and B and best of all C.

This is one of the queries I receive, in varying forms, every day.  Did policies such as the Community Reinvestment Act significantly worsen the housing bubble and the subsequent collapse?  Basically not, although in my view these were bad policies for other reasons.  They contributed to our current problems by only a small amount and of course these policies have been around for a long time before the housing bubble ever got started.  Here is one back-of-the-envelope debunking of the "diversity recession" idea.  Matt Yglesias links to some other debunkings.

You can, however, cite the general obsession with extending home ownership as strong evidence that putting Democrats in charge does not suffice to solve our regulatory problems.

Only polite comments will be left standing…

Steve Randy Waldman says yes:

I would support a standalone act authorizing the Fed to pay interest
on deposits immediately. I would prefer that Congress impose limits on
the quantity of deposits on which interest can be paid, to limit the
risk and interests cost to taxpayers, but that limit could be quite
loose for the moment. This approach has the advantage of getting
liquidity into the banking system far more quickly than the Paulson
Plan ever could have, and drawing a clear line between the liquidity
and capitalization aspects of the plan. It could be implemented
immediately by passing the one sentence Section 128 of the Paulson Plan
in isolation (although again, I’d prefer to muck it up with a limit on
the quantity of paid deposits).

Freed of its balance sheet constraint, the Fed might consider
injecting funds into the banking system by purchasing a diversified
portfolio of holdings in money market funds that trade in commercial
rather than government paper. This would help relieve the stresses in
the commercial paper market very directly, and reduce the likelihood of
a disorderly adjustment in nonfinancial commercial credit markets.

On a different tack, here are some very good ideas from Paul Light, an expert on bureaucracy.  And did you know that the FDIC currently has the power to guarantee short-term interbank lending?  The Paulson plan was in fact quite slow, so maybe its failure will force us to look for other and better options.

The best case scenario: The bad banks continue to be bought up, there is no run on hedge funds next Tuesday, only mid-sized European banks fail, money market funds keep on buying commercial paper, and the Fed and Treasury continue to operate on a case-by-case basis.  Since Congress doesn’t have to vote for something called "a bailout," it can give Paulson and Bernanke more operational freedom than they would have otherwise had.  The American economy is in recession for two years and unemployment does not rise above eight or nine percent.

The worst case scenario: Credit markets freeze up within the next week and many businesses cannot meet their payrolls.  Margin calls cannot be met and the NYSE shuts down for a week.  Hardly anyone can get a mortgage so most home prices end up undefined rather than low.  There is an emergency de facto nationalization of banks to keep the payments system moving.  The Paulson plan is seen as a lost paradise.  There is no one to buy up the busted hedge funds, so government and the taxpayer end up holding the bag.  The quasi-nationalized banks are asked to serve political ends and it proves hard to recapitalize them in private hands.  In the very worst case scenario, the Chinese bubble bursts too.

I still think some version of the best case scenario is more plausible, but I wish I could tell you I am sure. 

Megan McArdle piles on:

…what works in the banking system of a small economy does not
necessarily work in a large one.  For starters, no offense to the
Swedes, but very few other countries are affected by what happens in
their economy.  One family, the Wallenbergs,
indirectly controls something like 30-40% of Sweden’s GDP.  Even now,
the Swedish financial system is considerably less broad and complex
than that in the US; it’s not a world financial center.  And in 1992,
everyone’s financial system was a whole lot less complicated than they
are now…

Possibly the biggest problem with this plan,
among many, is that Sweden is essentially able to command the labor of
its bankers; they have relatively few alternatives without starting
over in a new country and a new language.  American government has no
such leverage.  Yes, the folks in the mortgage departments royally
screwed the pooch, but running a major bank is not something you can
hand over to a GS-17.  Nor is it a job for academic economists. 

And,
of course, the political ramifications in the United States are very
disturbing.  A small homogenous country with a parliamentary system and
a lot of social capital invested in the government is going to do
better at nationalizations than we will.  The fractious structure of
the American legislative system means–as we’ve just seen–that huge
amounts of political maneuvering and log-rolling will go into the
running of any national banking system.  Imagine the banking system run
by the Department of the Interior.

…The problem with
the Japanese system (or at least, one major problem) is that for
political, social, and career reasons, banks kept pouring money into
zombie firms, trying to salvage the bad loans of a decade ago.  Is a
nationalized banking system less or more likely to do this than a
private one, in America?  I imagine any banking head, appointed
or career civil service, would get a lot of calls from Senators and
congressmen demanding that the bank prevent companies in their
districts from going under.

There’s lot of talk in the blogosphere in favor of the Swedish plan, but not much consideration of its drawbacks.