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Excessive Caution

August 27, 2009 | RSS | EMAIL | PRINT | 2 COMMENTS

Felix Salmon offers a take on the financial crisis I hadn't heard (or thought of) before:

One of the themes of my talk was that it wasn't an excess of greed and speculation which led to the financial crisis, but rather an excess of overcaution, with an attendant surge in demand for triple-A-rated bonds. Investors didn't want risk, and investment banks made billions of dollars, during the boom, by waving their magic securitization wands and seemingly making that risk disappear.

As usual, I don't really know enough about this stuff to comment with any sort of intelligence, but it's an interesting angle.

Tags: economics, finance


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COMMENTS

1Abe Burmeister

It's a pretty astute observation, but I'm not sure overcaution is the right word (and in fact my spell check doesn't think it's a word at all...)

Rather than overcaution I think there was an excess of magic bullet sort of thinking, these securities promised solid to strong returns with almost no risk, and way too many institutions convinced themselves this was the truth rather than assume a deal that good was too good to be true.

That explanation dovetails nicely with the consumer side of the equation, where people convinced themselves that housing prices go up forever despite a world of historical evidence to the opposite...

August 27, 2009

2Bill Petti

I agree with Abe. He may be right about the demand for low-risk products, but that is far from the entire story. My comments here: http://wp.me/pB5tD-7N

August 28, 2009