Richard Posner wrote a fantastic blog piece (that I didn't post because it wasn't worth the effort, and no longer can find) about how we lost our ability to assess risk, meaning that systemically, we didn't understand its magnitude. Like Donald Rumsfeld's "known knowns, known unknowns, and unknown unknowns."
I've been pondering the role of the credit-rating agencies. These were the people who were (and are) "holding themselves forth" as the experts. Though they can shrug their shoulders and say, "we effed-up," why should they be ever trusted in the future? Do you see where I'm going with this? You have the Congressional oversight function (they effed-up), you have the regulators (they effed-up), and you have the private raters (they effed-up). Shouldn't the private raters be held to a higher standard, anyway? Because we know the government is effed-up?
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*think shuttle rocket boosters and O-rings
The tipping point? Bernanke raised interest rates and the scams were found out.
The claim that the crisis was due to an insufficient level of regulation is not convincing. For example, commercial banks have been more regulated than most other financial institutions, yet commercial banks performed no better than other classes of financial institutions. At the other extreme, hedge funds have been the least regulated, and on the whole they did better than most others in the financial sector. One major problem with regulations is the regulators themselves. They get caught up in the same bubble mentality as private investors and consumers. For this and other reasons, they fail to use the regulatory authority available to them. This implies that as much as possible, new regulations should more or less operate automatically rather than requiring discretionary decisions by regulators.
Probably inverting the yield curve. But the Fed had to do it, just like the Japanese had to pop their bubble in the late 90s.
But I wouldn't call it a "failure". Because it worked.