The Perils of Prosperity: The Story Behind the Economic Crisis

By Robert Samuelson
RealClearPolitics

WASHINGTON -- We need to get the story straight. Already, a crude consensus has formed over what caused the financial crisis. We were victimized by dishonest mortgage brokers, greedy bankers and inept regulators. Easy credit from the Federal Reserve probably made matters worse. True, debate continues over details. Fed Chairman Ben Bernanke recently gave a speech denying that it had loosened credit too much, though he admitted to lax bank regulation. A congressionally created commission opened hearings on the causes of the crisis. Still, the basic consensus seems well-established and highly reassuring. It suggests that if we toughen regulation, suppress outrageous avarice and improve the Fed's policies, we can prevent anything like this from ever occurring again.

There's only one problem: The consensus is wrong -- or at least vastly simplified.

Viewed historically, what we experienced was a classic boom and bust. Prolonged prosperity dulled people's sense of risk. With hindsight, we know that investors, mortgage brokers and bankers engaged in reckless behavior that created economic havoc. We know that regulators turned a blind eye to practices that, in retrospect, were ruinous, unethical and sometimes criminal. We know that the Fed kept interest rates low for a long period (the overnight Fed funds rate fell to 1 percent in June 2003). But the crucial question is: Why? Greed and shortsightedness didn't suddenly burst forth seven or eight years ago; they are constants of human nature.

(More here.)