My Books, Essay #9 - by Arnold Kling - In My Tribe
Policy makers did not anticipate the financial crisis of 2008. They did not really understand what was happening. They were unable to contain the economic damage. But they succeeded in controlling the narrative. The public was taught to believe that the crisis was due to bankers run amok and that the country was saved from another Great Depression by the unprecedented steps taken by Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson, and other public officials.
In a white paper published by Mercatus in September of 2009, I made a quixotic attempt to correct the record. This was Not What They Had in Mind: A History of Policies that Produced the Financial Crisis of 2008. 1
Bernanke enjoys a reputation as a hero. But I point out that rather than understanding the risks that were piling up at major financial institutions, in a speech in June of 2006 he extolled “the evolution of risk management,” praising both bank executives and regulatory supervisors for innovative uses of securities and derivatives that, less than two years later, had the financial system to the brink of collapse.
The crisis began with a rash of defaults on home mortgages and culminated in tremors on Wall Street, putting major financial institutions on the brink of failure. In my paper, I describe the event as having four components.
