More evidence for epistemic primacy

Firstly, to reiterate a point made by Jeff Friedman:

A study by Rüdiger Fahlenbrach and René Stulz [3] showed that banks with CEOs who held a lot of stock in the bank did worse than banks with CEOs who held less stock, suggesting that the bankers were simply ignorant of the risks their institutions were taking.

So all this talk about bonuses has the potential to be plain wrong. Maybe bonuses weren't the problem. In fact, maybe it wasn't primarily an incentive problem, but one of ignorance. Even The Economist is on to this:

Far from expertly manipulating their firms’ books, many could not understand them.

There's a really simple point here that no one seems to be grasping: the main cause of the credit crunch was the fact that we're not omniscient. Not bankers, and not regulators. And like it or not, a policy-solution is forced to assume that we are.

Comments

[Roy Cropper]

Maybe I am naive but I have always felt that the core problem was the expansion of the money supply. In effect banks had oodles of cash because of policies implemented by national central banks. They had to do sthg with this incerases in their reservse so they lent it out,loosening the criteria for lending out money. If one bank didn't do this they lost out to their neighbouring banks. Banking bonuses may have grown excessively as part of this competition. Plus if they didn't lend more then govts harried them into doing so, whipping up popular support by blaming the banks for pushing the economy toward recession for not "lending enough". In the UK the Brown govt was spouting such nonsense even in the early 2000's after the crash of the dot com boom.

Yes the market had its role but the core problem was the expansion of the money supply in the first place. If that hadn't happened - if credit had not been expanded as excessively as it was thru central bank manipulation - the boom would not have occured. But then the western economies would not have recovered so quickly from the dot.com boom (or gone into that boom in the first place).

[aje]

Roy - I agree completely. I think the expansion of credit is the root cause.