Two takes on the causes of the current credit crisis:
David Leonhardt had a column in the New York Times on 3/19/08 titled "Can't Grasp the Credit Crisis? Join the Club." It is good reading. The main message is that leverage can magnify risk in one small corner of the financial markets (e.g., subprime mortgages) into risk for major financial institutions (e.g., Bear Stearns).
Ben Stein had a column in the New York Times on 4/27/08 titled "Wall Street, Run Amok." (Ben Stein gave a lecture at UVM on 4/22/08.) Mr. Stein summarized a talk given by David Einhorn on 4/08/08 titled "Private Profits and Socialized Risk." Mr. Einhorn is the manager of Greenlight Capital, a hedge fund. Mr. Einhorn blamed the current credit crisis on: undue reliance on mathematical models; the rating agencies; and especially rules issued by the Securities and Exchange Commission in 2004 that allowed broker-dealers, such as Bear Stearns, to take on more risk. Both the Stein overview and the Einhorn detailed discussion are good reading.
Thank you to Ken Buzzell and Rocki-Lee DeWitt for bringing these columns to my attention.
