Bryan Caplan  

Best Ezra Klein Post Ever

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Here's the best Ezra Klein post ever.  And here's the best sentence of the best Ezra Klein post ever:
What's remarkable about the financial crisis isn't just how many people got it wrong, but how many people who got it wrong had an incentive to get it right.
P.S. It's interestingly consistent with my simple but unsatisfying theory that "Once in a century, a once-in-a-century mistake happens."

COMMENTS (18 to date)
rapscallion writes:

Did they really have much of an incentive to get it right? How many managers became personally penniless because their funds tanked? Weren't most of them assured that pretty much no matter what, they themselves could count on an upper-middle-class-to-rich incomes because they could always get a reasonably good job somewhere else (not to mention lucrative contracted severance pay). That is, if your worst case scenario is still six figures, why not bet the farm on a low-p ginormous return, rather than play it safe (i.e. diminishing marginal utility of money has consequences)?

Not too mention the moral hazard problems caused by big institutions being able to count on bailouts.

noiselull writes:

Ain't that what ABCT says is what happens during the boom part of business cycles?
(Sorry, Bryan. Had to do it.)

BZ writes:

"Once in a century, a once-in-a-century mistake happens."

I'm sure someone else has pointed this out, and maybe this is what you mean by "unsatisfying", but when so many people make so many mistakes of such magnitude, absent a systemic cause, the "once in a century" claim becomes a simple case of bad math. Given how obvious that must be, I can only conclude Dr. Caplan does subscribe to a "once in a century" systemic cause. What was that again? Obviously ABCT is out....but what's in?

ABCT is out... of course.


TDM writes:

The social incentives are to stay with the crowd and safety in numbers. It is a big social and job risk to go against everyone else and bet against a possible bubble.

E. Barandiaran writes:

Your own idea about a once-in-a-century mistake is the downside of Keynes' animal spirit. So we now have two complementary default options --one positive, and one negative-- to theories of business cycles. If you are interested in searching for arguments to support your default option, you may start by looking at a recent survey of the relevance of behavioral economics for finance by Morris Altman
Good luck. Let me tell you, however, that with Robert Heinlein, I'd argue "Never underestimate the power of human stupidity" (it has the advantage that it applies to both default options).

BTW, I have never read anything written by Ezra Klein but I'm curious about your statement that "Here's the best Ezra Klein post ever". Do you mean that you have read all his posts? Maybe Tyler, but you? I bet you that in the next 12 months you won't write anything good about future posts (I'm possessed by my Animal Spirit). You can name any person you trust to judge your blessing.

Elvin writes:

I won't comment on the professional financial class, but at the household level, I know a lot of people that got it wrong. Neighbors, relatives, colleagues at work all thought that owning a home no matter what the cost in terms of leverage was going to be worth it. One relative bought a house at six times her income. I know three neighbors that bought two houses, each thinking that they would profit on the old home while they moved up to a bigger one. A newcomer to the neighborhood--an executive in the insurance industry--insisted that an interest-only loan was the way to go.

All but one of these people were college educated. None of them had a sleazy mortgage broker pushing them, though the real estate agents were all saying what a great buy a home is. In retrospect, it was mass delusion.

Seth writes:

"...but how many people who got it wrong had an incentive to get it right."

Of course, they also had incentives to get it wrong (see Elvin's post for some examples). But those aren't easily seen with 20/20 hindsight.

I also think that the same incentives folks had to get it wrong about the financial crisis also cause people to handle folks like Ezra Klein with kid gloves.

But, I think I did learn something with this post. I think I have a better understanding of the meaning of self-recommending.

kebko writes:

Seth, I loved your comment.

It reminded me of how disappointed I was with Michael Lewis' "The Big Short". If we need an example of how so many people could buy into something so absurd, we only have to look at how predetermined the narrative of what happened is. In that post, it was refreshing to see Ezra Klein step out of the accepted narrative (his commenters will be hazing him for it), but if you want to write acceptable analysis of the crisis, the easiest way to do it is to pick the right good guys & bad guys. It's shocking how far you can stretch your story to fit as long as you get the setup right. In "The Big Short" it seemed like the same institutions were even playing both parts for Lewis at different times. If I paid too close attention, I couldn't keep track of who was supposed to be bad. It was easiest to simply watch for the literary versions of grainy footage and eery music to know who I was supposed to root against.

Matt C writes:

"Once in a century, a once-in-a-century mistake happens."

Ayuh, but the housing crash wasn't that. That will be the wave of sovereign debt crises that are looming in the headlights.

Which, like the housing market crash, many people are predicting now, and which we are continually being reassured won't actually happen.

The housing crash was similar to the S & L crisis from 20 years ago, but bigger and more destructive. For myself, I see all the "little" bailouts of countries on the ropes who have issued high interest bonds (bought by who?) as part of that same story too. Not 100 year mistakes at all.

PrometheeFeu writes:

I don't like your explanation because mistakes don't just happen. They happen almost invariably for a reason. Even forgetting your keys generally has a reason, even one as simple as: You had something else on your mind and were distracted. The only exceptions are the "oops I slipped" sorts of mistakes, but I don't think it makes sense to attribute the financial crisis to a series of typos and stumbles. Something has to explain why so many people screwed up the same way at the same time.

David J. Balan writes:

It is true that lots of really rich people made bad decisions in the run-up to the crisis and lost lots of money as a result. It seems that Bryan (and maybe Ezra, I'm not sure) is taking this as strong evidence against the "evil rich bankers" explanation for the crisis: if rich bankers suffered from what happened, then they presumably did not cause it to happen on purpose.

But I don't think that's right. Just because you can't calibrate your evil perfectly doesn't mean you're not evil. The finance industry has spent the past several decades fighting hard to make the world safe for rich bankers to be allowed to do whatever they want. They won that fight resoundingly, and then made a huge number of "heads I win, tails the government loses" bets, to their great benefit and to everyone else's great cost. It's true that they would have done even better if they had accurately identified the right moment to ease off, but that's hard to do, and the fact that they often didn't manage to do it tells us little.

Floccina writes:

I agree that it is the best Ezra Klein post ever. The conclusion should be that that regulating away the chance of it happening again is very unlikely to work. I think that as long as it is possible it likely to happen again.

It seems to me that the system is unstable due to feedback problems. I think that free banking or the post Keynesians' model could overcome the feedback problems but the post Keynesians' model would require a lot of changing of tax rates and so would not be politically feasible. One might be able to slip though a free banking by fooling the voters but that is also very unlikely. I guess that the world will experience the occasional banking crisis for the foreseeable future.

Costard writes:

A river, too, is complicated. It turns and twists, doubles back, widens, narrows, goes faster or slower.... none of which alters the fact that water flows downhill.

The crisis was inevitable and we knew it. For two years it was all anyone talked about. The argument was over timeline and manner, and the ability of the Fed to suppress or contain it. Just as our next crisis is already clear before us, and the discussion in knowledgeable circles today is, will it arrive in ten years or tomorrow?

Given the certainty of the outcome, what is the virtue of prediction? A gambler's wisdom is not decided by his ability to pick numbers, but his decision to gamble in the first place.

Bob Lince writes:

Yves Smith of Naked Capitalism disagrees, and not just a little bit:

Anthony writes:

I'm really puzzled by the praise Klein has gotten for this article. Those people who had incentives to spot a bubble had a lot of short-term incentives not to. It's not a coincidence that the US managed to avoid a financial crisis after the Great Depression for nearly 40 years--the federal government enacted banking regulations that limited excessive risk taking by systemically significant economic institutions.

The once in a century mistake was the product of ideologically motivated deregulation that became a full-throttle political movement under Reagan. Calling this disaster inevitable is merely an excuse not to repair a broken incentive system. We know economic crises are cyclical, but we don't have to exacerbate them with inadequate policies or by permitting fraud.

Yves Smith makes a good case against Klein's position here:

[url fixed--Econlib Ed.]

Tom Dougherty writes:


Everyone missed the financial crisis. Yeah, yeah, I get it. But what was the CAUSE of the financial crisis that everyone missed and got wrong? I bet if you asked 50 people what was the cause of the financial crisis you would get 50 different answers. If you can definitively tell me what the cause of the crisis was and why Wall Street should have seen this in advance to either prevent or profit from it then I will agree with you and Ezra Klein that people got it wrong.

But if you tell me it was the housing bubble that caused the financial crisis then I think you have a lot of explaining to do regarding the timing of the two events. The housing bubble burst well before the financial crisis. And I don't think you will convince Scott Sumner that it wasn't tight monetary policy of the Federal Reserve in the summer of 2008 that turned a mild recession into a great recession. And who could have predicted the politicians scaring the hell out of everybody in September 2008 in order to get legislation passed through the Congress? I don’t think anyone could have seen that one coming.

TomB writes:

His best post ever - the bar was set rather low...

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