The ever insightful Richard Posner writes:
I do not think that the government does bear much responsibility for the crisis. I fear that the responsibility falls almost entirely on the private sector. The people running financial institutions, along with financial analysts, academics, and other knowledgeable insiders, believed incorrectly (or accepted the beliefs of others) that by means of highly complex financial instruments they could greatly reduce the risk of borrowing and by doing so increase leverage (the ratio of debt to equity).
Posner fails to consider a host of contributing factors originating from government sources: the moral hazard Freddie and Fannie create, perverse tax incentives (starting in ’97) to overstimulate investment in housing, and the Clinton administration’s policies (again, starting in ’97) to increase home ownership among the poor. Still, the venerable Judge has a point. If all these mortgages were suspect, then why did all those Ivy Leaguers on the trading desks eat them up? Shouldn’t their 150 IQs have included a bullshit detector? Quoth the Seventh Circuit Judge:
It should be noted that because of the enormous rewards available to successful financiers, the financial industry attracted enormously able people. It was not a deficiency in IQ that produced the crisis.
But are they able enough? And were the rewards high enough to attract the most able? The New York Observer has been the first to buttonhole Tom Wolfe and ask him what he thinks of the current crisis. (It’s about time someone got a hold of him, fer Christ sake. Whenever there’s a Wall Street story, a thousand reporters invariably trundle out references to the Bonfire of the Vanities and the Masters of the Universe.) Wolfe has a peculiar theory about the failure of investment banks–it’s brain drain, he says. Instead of turning into cubicle donkeys, the best and the brightest in finance have all found their way to hedge funds, leaving space at the trading desks for all the second-raters out of Harvard. Herr Wolfe:
there’s nothing as second-rate as investment banks. Every smart and ambitious young man—and forget young women because they don’t play any role in this—wants to be in a hedge fund. And I’d be surprised if the hedge funds implode, they’re just smarter. … What bright guy wants to be an executive for a firm like Lehman Brothers, where you have to hold the hand of disgruntled employees, you hold the hand of disgruntled directors, you’re constantly nice and wearing the right clothes? That’s for real second-raters. … It’s only the bottom of the barrel that’s left in these companies. The new Wall Street is Greenwich, Conn. You don’t need these big glass silos full of people. Look at the number of employees. Lehman? 28,000! And a Greenwich hedge fund can handle the same amount of money with 20 employees.
And just for kicks, Wolfe adds, “Did I mention to you I’m pimping out my cars?”