First, monetary policy. While there seems to be a widespread consensus that it was too lax in 2002-04, this is a viewpoint made with the benefit of hindsight. As Orphanides and Wieland (2007) [pdf] have pointed out, according to the Greenbook forecasts, monetary policy was not -- according to a Taylor rule framework -- overly lax.
Second, deregulation. On this front, I think it's important to not indict all deregulation (eliminating the Glass-Steagall barriers makes sense to me [WM: note opposite view from Stiglitz, below], while the Phil Gramm-sponsored Commodity Futures Modernization Act exemption of regulation of CDS's does not). I outline some empirical research on what factors were important in this crisis in this post.
Third, regulatory disarmament/nonenforcement and "criminal activity". I would have discounted this item in the absence of clear evidence, but now that we know about how the OTS "helped out" IndyMac  , I think we can be reasonably confident that we'll hear a lot more about how deregulatory zeal   metastatized over into criminal activities on the part of regulators and the regulated.
Fourth, fiscal profligacy via tax cuts. I think it's important to focus on profligacy (because it pushed the economy more into a boom exactly at a time when not needed) and on tax cuts (because it made people feel like they had more discretionary income than reasonable), thereby pushing the asset boom.
Fifth, tax policy. In particular, I have been thinking about the tax deductibility on second homes, a provision dating back to 1997   . (I've been thinking about this in part because mortgage deductibility on a second home never made sense to me, let alone on a first home). Capital Games and Gains has pointed out this provision, citing a NYT article. But even this last article doesn't locate primary blame here; rather it's cited as a contributing factor. I suspect that on its own, this provision wouldn't had a big impact, but in combination, it might have. My caveat here is that I haven't found much empirical work backing a big role for this factor.
The author's point about the "synergy" or interactions of these variables generating a sort of bubble is critical and persuasive. This is precisely the kind of "systems thinking" whose absence from official Washington (not to mention the irresponsible CEOs who did so much to create this crisis). Things interact. The author is to be credited for admitting a personal and erroneous inclination to "sum" the effects. Most of us tend to make this assumption, which is the second mistake, since there is absolutely no logical reason to anticipate that effects will neatly sum: they may multiply or somehow undercut. No theoretical reason seems to exist for assuming any particular effect. Things could cancel each other out or cause a snowball.
To summarize, decision-makers make two elementary, fundamental mistakes of enormous significance:
- they assume things are separated by some kind of invisible firewall;
- they assume that when things do connect, they either add or subtract.
That paves the way for pointing out that the author quoted above omitted "just one more thing:" the neo-con war fever of the last seven years. One could analyze the purely financial impact of blowing a trillion dollars on foreign wars, but that is not even close to my point. The real impact of the "war fever," the blatant hubris of an America not just expansionist but glorying in its self-perceived omnipotence, was probably psychological for it fit ever so nicely with the national house-buying binge. When you feel as though you have a personal money tree (the rising value of your house during the expansionist phase of a bubble) and simultaneously the Government sends you the signal that it has the ability to rule the world without asking you to make any sacrifice whatsoever, unless you are extraordinarily independent-minded, you will become the victim of a little hubris yourself.
The war fever and house-buying fever also interacted with a third display of hubris: the investment fever. People began to focus on becoming a success through financial trickery rather than making something. Nobel laureate and economist Joseph Stiglitz described this cultural shift as follows:
The most important consequence of the repeal of Glass-Steagall was indirect—it lay in the way repeal changed an entire culture. Commercial banks are not supposed to be high-risk ventures; they are supposed to manage other people’s money very conservatively. It is with this understanding that the government agrees to pick up the tab should they fail. Investment banks, on the other hand, have traditionally managed rich people’s money—people who can take bigger risks in order to get bigger returns. When repeal of Glass-Steagall brought investment and commercial banks together, the investment-bank culture came out on top. There was a demand for the kind of high returns that could be obtained only through high leverage and big risktaking.
Vanity Fair writer Michael Wolff, commenting on the situation that private-equity companies now find themselves in, brilliantly summarized the predicament of American society as a whole:
being comfortable with there being no there there is the talent. That’s the private-equity genius: We’ve figured out how to buy companies without putting up the money; we’ve figured out how to run them without knowing anything about them.And if I may continue (with credit due to Mr. Wolff for his phrase), we've figured out how to invade countries without asking our own population to sacrifice (print more money). We've figured out how to fight prolonged ground campaigns without a draft (hire ex-death squad gentlemen from Latin America). We've figured out how to consume madly without making anything (buy Chinese junk, which we pay for with Chinese loans that Beijing won't call because their social stability now depends on our appetites). We've figured out how to live in houses we can't afford (get Washington to give foreclosure protection) and get away with risky financial games (capitalism for winners and socialism for losers).
American society has been infected with three separate diseases simultaneously: house-buying fever, financial trickery fever, and war fever. As any good doctor can tell you, having three separate diseases simultaneously can produce all sorts of consequences as the debilitating effects of one intensify the impacts of the others. This is all the more true of psychological problems, where the bottom line message of all three was identical: we're winning and the harder we play, the more we will win.
So over the last seven years, Americans--politicians, CEOs, and folks in the street--tended overwhelmingly to believe they could do no wrong, that they could binge endlessly and suffer no hangover. The idea of links between personal behavior and national behavior, between war and the economy, between actions and morality was dismissed as not only ridiculous but unpatriotic. Such willfull, self-serving blindness of course did not make it any easier to perceive that not only are things connected but that the outcome of such connections may well be highly, highly nonlinear, i.e., when the chickens come home to roost, they may land suddenly and with great force on your face. (Sorry, sometimes technical language simply cannot be avoided.)
The bubble was not just housing or Wall Street profits or Wall Street irresponsibility or criminal behavior in the banking system or expansionist lust in Washington...the bubble was a bubble of social immaturity.