Guido Tabellini began a two-part series of articles investigating the origins and lessons of the current crisis. He lists three kinds of causes: market and regulatory failures and the mistakes in managing the crisis. Financial firms, blinded by innovative products, failed to see mounting risks. Regulatory agencies did not tend to the analysis of risks of the whole sector rather than individual firms’. Tabellini’s contribution is to describe how the initial subprime shocks were amplified. The lingering question is how to regulate multinational banks that are too big to fail at home and abroad.
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The unclear causes of the crisis have resulted in its management being improvised from step one without a clear path in mind. Bear Stearns was saved, Lehman Brothers failed, AIG was saved. Each decision was improvised, guided by neither pre-established criteria nor a sound and consistent strategy. The result is that, rather than boosting confidence, economic policy interventions have contributed to increasing confusion, panic, and fear.
