Tyler Cowen may have an explanation to the financial crisis, though his off-Paper forecast may add more scope to the analysis. Tim Harford talks about the off-record side deals, which did not follow the Rules of sensible Risk, and brought down the Whole when they became too massive. I believe there were two basic Reasons for the Crisis: Business personnel were overcharging for their own contribution to the Economy, and they insisted on a like rate of Return for their Investments. There was also a commitment to an ideal which I have never found existent: The claim that an Organization can get too big to fail. A combination of usurious greed and over-optimistic beliefs brought down the entire process. We are now down to Governments being too Big to Fail, a Concept resident in the Foolhardy.
John Quiggin would blame the rating agencies, which I cannot really criticize as it is so true; yet, We deflect from the primary agents–those who created the bad debt in the first place. The basic problem with critique of the rating agencies lay in their intrinsic lack of knowledge in their forecasting procedures. There is continual pressure to present good Ratings coming from the Seekers of those Ratings, without any support from Those relying upon the ratings for Investment decisions. Seekers utilize the lack of failure as pressure to increase the Ratings, and proclaim any downgrade to be a betrayal. Those who relied on faulty assessments for Investment do not blame the Sellers of bad debt, as much as they blame the Raters of that Debt. Investors get less from Rating agencies than they desire, but have paid almost nothing up-front, trusting to the moral integrity of Raters, who are basically paid by the Seekers of good Ratings.
Every Crisis brings out Explanations of how previous Great Economic Thinkers had already noted the quality and context of the Crisis. This is one of those Referrals which is better than Most. Keynes did have much criticism of unregulated markets. The real Problem in the current Crisis was not runaway markets, or the dastardly Asset bubbles inside a stable Price format. It was the static suppression of ordinary Wages, coupled with the rapid acceleration of Innovative Wage scales. New Wealth rose rapidly, Investments rose rapidly, and Prices rose steadily, all while average Wages stagnated. Consumer markets left ordinary Debt aggregation, and entered extraordinary Debt aggregation, as average Wage earners tried to maintain the increased Price pacing. The New Wealth of the Innovative Wage-Earners insisted on the same accelerated Gain in Investments, as they received in Wages. They pursued Risk because it paid more. Then the Bottom fell out, as Returns could not be generated, and Equity existed only on Paper. lgl