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Good question. And a hard one. Brad Delong's blog would be the first place to look. He has been putting stuff there for his students.

I wish I had a better filing system in my brain. This last 3 years has been such a blur.

This is not suitable for professionals, but the best journalism on the crisis was done on NPR with a program on "This American Life" called "The Giant Pool of Money". Google that phrase and it will be near the top.

Well, you really have to talk about the Great Moderation since 1980 and how where interest rates went.

Then you have to talk about three areas: The US housing bubble, the US/China trade relationship and the pile-up of capital in the US and the Euro crisis. They are all separate but interrelated.

The actual theory you use will depend on how you analyze these topics, but they are the specific problems that will motivate your search for theory to fill out a narrative.

Excellent documentary. I am at 22 minutes and I want to make a point. In direct refutation to Ian Lee, Carleton prof, it is clear from this documentary that in fact there was a general, private-sector driven demand to lower and loosen credit standards in the US.

We have testimony in this documentary from first-hand witnesses that experienced mortgage underwriters, the prudent bank managers as Ian himself once was, were sidelined, superseded and ignored. Madness prevailed. You can't blame government regulation for this. NINJA loans existed because the market wanted them to exist. The market provided the capital for those loans. Nobody held a gun to the heads of the investors who provided that capital.

There is a lesson here about mania, animal spirits and plain old greed that should be told.

I'm not clear on whether you are looking for a plain chronology of events (e.g. exactly when the Fed introduced which facilities etc.) or analysis?

Regarding the latter, you would want to include a version of the bank run story, and the best is probably the Gorton & Metrick paper: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1440752&rec=1&srcabs=1324195.

This BIS paper by by Allen & Moessner covers similar issues but from an international perspective: www.bis.org/publ/work348.pdf.

For a UK perspective, the novelist John Lanchester wrote a brilliant series for the London Review of books, summarized here: http://www.lrb.co.uk/v31/n10/john-lanchester/its-finished. Unfortunately, since Lanchester is writing for a literary audience, he explains many matters that will be well-understood by your students. However, he is an engaging writer and he provides a genuine summary and analysis of events, not just a Michael Lewis-style story focused on characters.

Stephen - in responding to Determinant, I am providing some excellent source material re the 2008 crisis in the US.

Determinant - I never said that the private sector did not agree to and participate in the watering down of mortgage credit underwriting standards.

Moreover, I much prefer serious scholarship by serious scholars over broadcast videos in mass media to provide credible research.

I argued then and now that government is the ultimate regulator and referee in any society. In Max Weber's famous phrase, "government possesses the legitimate monopoly of coercion".

Government was and is responsible for the regulation of the financial sector and it failed to do in the USA and Europe - unlike Canada.

The 2008 financial crisis was not a market failure but a government failure and more precisely a failure of Congressional oversight.

Prof Stan Liebowitz Univ of Texas), published an empirical analysis of the 2008 housing and financial crisis: Anatomy of a Train Wreck and several Op-Eds in WSJ, he provided compelling evidence of the role of Congress.

Prof Charles Calomiris, Columbia U Kaufman professor of financial instituions published several pieces concerning his research that came to similar conclusions.

Gretchen Morgenson, NYT business reporter, published Reckless Endangerment came to similar conclusions.

Finally, in 2011, 4 NYU profs published Guaranteed to Fail: Fannie Mae, Freddie Mac, and the Debacle of Mortgage Finance Viral V. Acharya, Matthew Richardson, Stijn Van Nieuwerburgh & Lawrence J. White. Below is the Summary.

Guaranteed to Fail explains how poorly designed government guarantees for Fannie Mae and Freddie Mac led to the debacle of mortgage finance in the United States, weighs different reform proposals, and provides sensible, practical recommendations. Despite repeated calls for tougher action, Washington has expanded the scope of its guarantees to Fannie and Freddie, fueling more and more housing and mortgages all across the economy--and putting all of us at risk. This book unravels the dizzyingly immense, highly interconnected businesses of Fannie and Freddie. It proposes a unique model of reform that emphasizes public-private partnership, one that can serve as a blueprint for better organizing and managing government-sponsored enterprises like Fannie Mae and Freddie Mac. In doing so, Guaranteed to Fail strikes a cautionary note about excessive government intervention in markets.


Your recent rebuttal is at odds with your postings in this thread: http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/07/armageddon.html

There you proceeded to place the squarely on government regulation, US government-mandated weakening of credit standards and expressed shock that experienced bank managers could participate in such lax credit practices. In particular I draw your attention to your post at 8:36 PM on July 10th.

This documentary provides direct evidence through participant testimony to the contrary.

In my opinion the role of private capital and the failure of market participants to foresee the risk and voluntarily participate in "liar loans" needs to be told and explained. Any narrative of market rationality needs to confront the wilful ignorance of signs of bad creditworthiness on the part of lenders to the point of accepting or abetting fraud. We really need to look at this from the point of a credit mania.

When I say nobody held a gun to the head of lenders, I mean that they didn't exit the market. They could have. In Canada banks withdrew from mortgage lending in the 1960's when they were confronted by a statutory 6% rate cap on loans. They returned to the market when that cap was removed.

My point here is that there are a number of uncomfortable facts and documented patterns of behaviour that challenge conventional views on rationality and the ability of knowledgeable, experienced market participants to avoid a mania.

I do not wish to divert this thread into a debate on regulation, but I would note that the money left private lender's hands and went to unworthy creditors. It is private lenders who are chiefly responsible for the loans they themselves made.

This by James Hamilton is good.


This summary by Konczal is good. It especially looks at the problems with the work of Pinto and Wallison. I believe it has the links put up by Bill Black to Wallison's testimony in Congress that the GSEs were not making enough loans.


Almost anything by Bill Black should be included. As a criminal finance guy, his views are especially enlightening.
His experience with the S&L crisis is important. If I were running a course I would contact him for information about the California subprime market that was aborted in the early 90s by regulators that were actually regulating.



The FCIC report if you are a masochist.



Thank you steve. Mike Konzcal's position is exactly what I was arguing as important.

He also directly refutes the position taken by ian lee in the July thread.

"In doing so, Guaranteed to Fail strikes a cautionary note about excessive government intervention in markets."

This is the only one of your references with which I am not familiar. Does it use original research or does it rely upon the work of Wallison and Pinto? I would balance this with 13Bankers by Simon Johnson. I think that when you go through the evidence, you had all the pieces to create a banking crisis w/o the GSEs.


GSEs??? God! Did anybody see what we did with ABCP in Canada? Somebody want to blame CMHC? This is a ridiculous red herring. There was a credit bubble of insane proportions. It was fed by agency problems and gross misalignment of incentives. Fund managers with no personal exposure to bad investments bought toxic paper from investment bankers (who were effectively protected from fraud laws via securities regulations) based on the advice of rating agencies who were paid by the investment banks and who were protected against the consequences of lying by their constitutionally guaranteed right to free speech. It was all very rocket sciencey and there were fancy derivatives that you wouldn't understand and the rating agencies are very serious people and the bankers wear Armani suits and the banks are made of marble. And yes, the regulators were totally clueless and nowhere near the scene of the crime. This is all very basic negative-externality-from-misplaced-agency economics. And since we didn't actually fix any of the regulations that were created by and which protect these industries we'll no doubt be doing it all again in a few short years.

In addition to the fraud aspect raised by steve's sources, I would add that the problem of the derivatives market can and should be addressed from two well-known legal/financial/economic principles: The hedging/gambling distinction and bucket-shop laws.

The difference between legitimate hedging and speculation or gambling is contained in the Life Insurance Act 1774 (date is right, it's over two centuries old): No one may insure in life insurance a potential loss that they will not suffer. A person has an unlimited interest in their own life, but you don't live to collect on your own insurance policies. You can insure your business partner to buy out his half of the business, but I can't buy an insurance policy on Nick Rowe as I have no financial interest related to him.

Before this act people used to purchase life policies on famous people as a form of gambling. Property and marine insurance has a similar concept. It's a good way to easily distinguish between a legitimate hedge and speculation in one easy point that can be delivered in a lecture.

Bucket-shop laws are part of the investing/gambling distinction, see spread betting also, it's treatment in the UK is illuminating.


Many derivative contracts could run afoul of these laws and the American Commodities Futures Modernization Act of 2000 exempted derivatives such as Credit Default Swaps from state insurance and bucket shop laws.

Why make derivatives complicated when they can be analyzed simply with century-old laws? Further, the life insurance industry is well-regulated and does not pose systemic risks. The CDO market did and the different in which laws were followed is the key difference.

Determinant: I dislike that explanation almost as much "the GSEs did it!" The naked shorts didn't cause the runup. It was caused by the naked *longs* who had no idea what they they were buying. The shorts starting getting in as early as '04 but really mostly in '06 - '08. To some extent they acted to counteract the bubble and may have triggered the collapse somewhat earlier than otherwise. The ability to short the RMBS CDO market with the introduction of the TABX in Jan '07 certainly appears to coincide with the beginning of the end. It was also the first contract to start widening and appeared to be the canary in the coal mine. But when the crash occurred it wasn't the shorts selling. It was the terrified longs. The shorts, in fact, are the only ones who have the stomach to buy as a collapsing market returns to what they consider fair value. The longs, most of whom never had any clue about fair value in the first place, no longer have any bearings except fear to guide them.

Here's the thing: short sellers take risk (unlike rating agencies and investment bankers). They are an equilibrating force in the market every bit as crucial as the professional longs. Without them prices can only reflect the expectations of those who think things are going to get better. Efficient markets can only occur when everyone is able express their view in the market in proportion to their wealth and the strength of their convictions.

Aside from that, OTC derivative short selling bans are ridiculously easy to circumvent. But that's another matter.

Determinant - I do not want to stretch this out either. But Stephen will presumably be addressing these absolutely central issues in his course.

I do not understand your argument or anyone who argues that on the one hand US mortgage underwriting standards (good or bad) had little or nothing to do with the financial crisis and on the other hand that some banks made high risk mortgage underwriting decisions - that was the principal or major driver of the US financial crisis.

One more time.

1. in western countries, governments are directly responsible for regulation of financial institutions and especially of deposit taking institutions e.g. Canadian Bank Act, OSFI, European Banking Authority
2. the US Congress weakened the underwriting rules starting in the mid 1990s - on the record - embedded in the relevant legislation that later allowed banks to make the decisons they made (God may struck me down with a lighting bolt for invoking their names but Stiglitz & the billionaire Soros make very similar arguments)
3. some (many?) banks seized this Congress mandated opportunity of de facto deregulation - to approve high risk mortgages to people with low or no down payment, weak credit scores and/or low income
4. see Prof Liebowitz original empirical research as well as Gretchen Morgenson analysis in her columns in NY Times (not known as a right wing paper) and the 4 NYU profs in their Princeton University Press publication

My overarching thesis is clear - governments ought to and must regulate banks - including mortgage underwriting - including minimum down payments, GDSR, TDSR, loan to valuation ratios etc.

The US Congress did the opposite in deregulating the banks in certain important product markets in the mid and late 1990s, culminating in the Financial Modernization Act of 1999 championed by Robert Rubin, Larry Summers et al.

The Congress is ultimately to blame for any failures of regulation including deregulation because the Congress or Parliament is sovereign in passing laws and regulations to regulate, inter alia, financial institutions.

To suggest that the banks - and ONLY the banks - were responsible for their high risk decisions is to implicitly deny the role and responsibility of government in regulating financial institutions (or of any area of the economy and society).

Any financial market failure is ultimately a government i.e. a legislative, failure for we elect MPs and Congresspersons to do pass laws and regulations to properly regulate our institutions.

That is why democracy is remarkably just as Winston Churchill noted - for we get the governments we deserve for we elect them - good or bad.

Ian: OK. But *why* did congress change the regulatory environment and for who's benefit? What if the system failure is a constitutional system that incentivizes legislators to channel the benefits of power to special interests like the financial sector? And what if there are massive informational asymmetries between the voters and the special interests in terms of their understanding of the underlying sources of economic rents? Do the voters "deserve" what they get in the sense that it's their fault that they are too stupid to understand exactly how it is that they are getting screwed?

Saying that the banks were bad or that congress was bad is obviously besides the point. Economists understand that all humans respond to incentives. If the incentives are bad, the outcome will be inefficient (not to mention unfair). To blame the "bad" people is to rail at the wind. Mancur Olson described the economics of how democracy would be destroyed by special interests the way we are seeing in The Rise and Decline of Nations (1982). That, and Minsky's Can "It" Happen Again (also 1982) really get most closely to the underlying dynamics of how we ended up where we are.

All regulation ends written by our clientilist bureaucrats of the revolving doors and then gamed by the regulated sector. Regulations (the more complex the better) end up constituting subsidies and barriers to entry. The answer, in fact, is to *deregulate* and eliminate the interactions between industry and government. For banks, for example, that means 1) terminating deposit insurance, 2) letting the banks raise capital in the free market (like everyone else) and 3) giving every citizen and corporation equal access to keeping risk free deposits at the Fed - just like the banks. Then when we no longer depend on the banks for the stability of our money we can let them be "free" of all the nasty regulation and they can live and die by quality of their own choices.


To be clear, I was trying to provide a concise way to analyze the economic substance of the derivatives market. I was not trying to argue that derivatives were the main problem, so I apologize if I was unclear.

My point was that existing and well-known legal concepts provide a good way to separate the wheat from the chaff in the derivatives market. I agree that the derivatives market was not the primary cause, it was a secondary symptom, but as a topic it has to be addressed in Stephen's lecture series.

When you look at derivatives through the eyes of the Life Insurance Act, 1774 you have a handy way to analyze the impact of derivatives and if a transaction is a legitimate hedge or a risk-increasing gamble.

A legitimate hedge is a unilateral ceding of risk for a premium: I pay you a premium, you pay for my car if I get in a crash. A gamble is a contract that mandates bilateral risk of the same kind: heads I win, tails you lose.


Absent regulators can and should be blamed, but not primarily. From what I understand the primary responsibility for the credit-worthiness of a bank's loan portfolio is on the bank. Regulators are secondary. No bank or other finance company will enter Step 3 unless it chooses to do so voluntarily.

If a bank makes bad loans it the ultimate responsibility of the bank. To carry your thinking to the extreme means that the management of the Bank of Montreal, with whom I have banked since the age of 6 BTW has no responsibility for their strategy choices and the financial success/failure and risk profile thereof. Bank can voluntarily surpass regulation. The Canadian chartered banks, for instance, routinely surpass OFSI mandated level of Tier 1 Capital. OFSI mandates that the big banks of 8% Tier 1 Capital, the Canadian average is 9.8%.

Your argument contains a deductive fallacy by overlooking the commercial strategy choices of financial firms, which the first and last check before a bad loan is made.

More generally, any narrative of this crisis needs to explain why financial managers fell into a mania like the South Seas bubble of 1729.

Determinant - of course bank managers and Internal Audit i.e. the internal bank inspectors or regulators - are responsible up the corporate hierarchy to the CEO to the Board to shareholders. No question.

In my almost 10 years in banking, I never met anyone from the government predecessor regulator to OSFI. But we had an annual visit from Internal Audit (who randomly evaluated loans approved in consumer, mortgage and commercial to determine level of due diligence, documentation, collateral etc) which scared the living hell out of us, as their findings could mean your termination or demotion.

However, in the debate since 2008, the focus did not focus on internal private corporate governance but rightly focused on public policy in addressing the question: what went wrong?

Krugman and many others argued it was due to corporate malfeasance and greedy banks without acknowledging let alone permitting the obvious recognition that the financial services sector is much more heavily regulated than most other sectors and by attacking those who note the complicity of the US House and US Senate and Fanny and Freddie.

The US regulatory failure was emphasized by the clear differences between the US and Canadian regulatory systems of mortgage underwriting with the latter specifying maximum loan to value ratios, requirement for mortgage insurance, income standards etc.

My critique of the “greedy banks” hypothesis is that this is an obfuscation which avoids assigning culpability where it belongs – the regulators. I suspect this is because intellectuals admire then US House Banking Chair Barney Franks (D) and then US Senate Banking Chair Chris Dodds (D) (the two received more in campaign finance contributions from Fanny & Freddy than all other members of House and Senate) and their generally interventionist policy position concerning banking. Yet, we cannot fix what we refuse to acknowledge.

Below I have provided some quotes from Chris Walen review of Black Box Casino, as this book seems to more comprehensively capture what really happened.

"In his new book Black Box Casino: How Wall Street’s Risky Shadow Banking Crashed Global Finance, Robert Stowe England provides some compelling data and analysis that adds to the collective understanding of the subprime crisis. Leading analysts such as Barry Ritholtz, Josh Rosner, Gretchen Morgenson and Joe Nocera have been debating whether Washington or Wall Street owns the blame for “causation” in the subprime mess".

"Instead of treating Washington & Wall Street as separate fa"ctors, England instead describes the interaction of Fannie Mae, Freddie Mac and the large Wall Street banks as part of a single market. By focusing on the new bank capital standards put in place in 2001, the subsequent increase in subprime lending by Fannie Mae and Freddie Mac after 2004 and the amazing explosion of cash and derivative private label RMBS, Black Box Casino describes the affordable housing partnership as a true collaboration between the Wall Street banks, national realtors, home builders, politicians and community activists".

"In Chapter 3, for example, appropriately entitled “Seeds of the Disaster,” England describes how the culture of affordable housing in Washington was enforced by federal bank regulators such as Boston Fed President Richard Syron. Under his leadership, the Boston Fed published a series of scathing research reports detailing the “racist motives” behind bank lending patterns in New England – a message that was also being delivered by Fed examiners working in that region".

"The point here is that a series of positive and negative incentives emanating from Washington and driven by politics did alter bank lending behavior during the past decade and more. Badly underwritten loans were then sold to investors. You know the rest of the story. When it comes to credit availability, were we are today is closer to normal".

For the complete review, go to:


But I had to quote the conclusion, as it is so compelling.

"The GSEs and private MIs, whose pricing was forced down by the GSE’s artificially low risk pricing, were equally enablers in the sense that the pricing of their guarantees was an order of magnitude too low to cover the true economic risk. The fact of Washington’s subsidy of the prime mortgage market and the political protection offered to Fannie and Freddie by politicos like former CT Senator Christopher Dodd is described nicely in Black Box Casino, particularly the refusal of Dodd, Rep Barney Frank (D-MA) and other key Democrats to move on GSE reform".

"Barney Frank, Chris Dodd and many other politicians of both parties leveraged the housing market with the full faith and credit of the US Treasury. The tab for Fannie, Freddie and FHA is north of $170 billion and climbing".

"Black Box Casino tells this story in a well written and sourced perspective on our shared misery".


Black Box Casino was rebutted by steve's links, among them the research of Bill Black. Actually Bill Black refuted your entire argument.

I am not obfuscating anything; I am clear that regulators are secondary. I have no opinion of individual US Congressmen or Senators.

Ultimate responsibility for lending decisions rests with the actual lender, the bank issuing the loan. I cannot see how you jump from lauding the BMO's internal auditors and never seeing an actual Canadian regulator (a common testimony in Canada, you aren't the first to say this) to saying that the regulators must be to blame for the US mess.

US lenders could have policed themselves like the BMO does, they didn't. They chose not to. That is the heart of the problem.

Your argument is a straw man using the meme of "blame government".

I cannot accept this straw man. A narrative that has this meme must be challenged. It easily slides into things like Efficient Markets Hypothesis and others.

The horribly uncomfortable thing is that the US lending market entered a mania, a classic mania like the South Seas Bubble or the Dutch Tulip Bulb Bubble. Or Bre-X, to cite a recent Canadian example. Bubbles like this throw EMH out the window, along with many assumptions about rationality. Which means a lot of macro models are just not going to fit, which is my point for Stephen's lecture series. We have awkward facts that will demand awkward models.

Determinant - the key difference between our two positions is captured in your following paragraph:

"I am clear that regulators are secondary. I have no opinion of individual US Congressmen or Senators. Ultimate responsibility for lending decisions rests with the actual lender, the bank issuing the loan. I cannot see how you jump from lauding the BMO's internal auditors and never seeing an actual Canadian regulator (a common testimony in Canada, you aren't the first to say this) to saying that the regulators must be to blame for the US mess. US lenders could have policed themselves like the BMO does, they didn't. They chose not to. That is the heart of the problem".

Determinant - you are correct - US lenders did not police themselves (because they were in bed “cohabiting“ with failed Congressmen, Senators, government sponsored corporations and government agencies). But that is exactly and precisely why society passes and establishes laws, regulators, police and courts to enforce policies embodied in laws and regulations.

As Lincoln noted in his First Inaugural, we are not all touched by the ""better angels of our nature"" or as "Thomas Hobbes put it, "why do we lock our doors at night?" Alas and unfortunately, there are people that break the law (passed by the sovereign or Leviathan) - and so we hire police and crown attorneys and investigative bodies e.g. SECs, OSFIs - in short the entire machinery of government - to ensure that illegal or unacceptable behaviour in your implicitly anarchist world will be punished.

After all, if Leviathan cannot or should not protect us from illegal behaviour or wrong doing, why do we surrender our powers to the Leviathan? If the citizen must pay substantial tithes to the state, then surely in return - in exchange for this social contract - Leviathan should protect us. Otherwise, let us return to the Hobbesian jungle.

Your position is most curious. You state that, Banks acted wrongfully and are to blame – not state regulators. Therefore, you seem to suggest we must pass additional laws to prevent what is not the responsibility or domain of the regulators who will be enforcing the additional laws or regulations to prevent the illegal bank behaviour that is not the responsibility of the regulators to regulate.

Stephen, I suggest stealing from Larry Summers' syllabus for his Harvard course entitled Crisis Economics:
History and Evaluation of the Policy Response to the Great Recession

Whoa. That's a *great* catch! Thanks so much!

I hope I'm not wearing Stephen's patience to thinly, but in short I believe that the last check before a disaster is the loan officer's pen. The hubris of the credit boom, the fact that financial companies attracted capital from the voluntary wholesale deposit/debt market and turned around and lent it out with lax to either egregiously ignorant or fraudulent credit standards needs to be explained. Why did the market fund this, why were these firms able to attract capital?

We saw a Bre-X style mania in the US housing market.

Regulators regulate after the fact. The primary responsibility for forward-looking risk evaluation, avoidance and mitigation lies with the firm. Regardless of what regulators did or did not do, it was firms themselves who threw their credit standards out the window.

Regulators declare make broad rules and make examples of egregious offenders. They aren't omnipotent. The sin started with the firms, they indulged in that sin, failed to check it's expression and must bear responsibility for it.

(Yes, I'm a churchgoer which is why I was invoking sin.)

Ian Lee : Another take from Ritholtz:


Since Ian Lee has dragged the venerable Max Weber into the discussion, I cannot resist a pedantic digression. Weber did not say "government possesses the legitimate monopoly of coercion", but rather the modern state "is a human community that (successfully) claims the monopoly of the legitimate use of physical violence within a given territory" (or, in the original German, "diejenige menschliche Gemeinschaft, welche innerhalb eines bestimmten Gebietes – dies: das „Gebiet“, gehört zum Merkmal – das Monopol legitimer physischer Gewaltsamkeit für sich (mit Erfolg) beansprucht"). This elegant definition was not meant to propose what the state should or should not do, but rather to define what in fact makes the modern state unique. I don't believe it bears much of any relevance to policies on market regulation, except to say that the state uniquely may ultimately resort to physical force to enforce any such policies.

Nevertheless, I commend Weber's essay, "Politics as a Vocation" ("Politik als Beruf") to your readers as, in the words of Prof. Harry Eckstein, "the greatest essay ever written". And perhaps we can apply this passage about politicians to Alan Greenspan and company when they were enacting the cult of the deregulated market:

Now then, ladies and gentlemen, let us debate this matter once more ten years from now. Unfortunately, for a whole series of reasons, I fear that by then the period of reaction will have long since broken over us. It is very probable that little of what many of you, and (I candidly confess) I too, have wished and hoped for will be fulfilled; little--perhaps not exactly nothing, but what to us at least seems little. This will not crush me, but surely it is an inner burden to realize it. Then, I wish I could see what has become of those of you who now feel yourselves to be genuinely 'principled' politicians and who share in the intoxication signified by this revolution. It would be nice if matters turned out in such a way that Shakespeare's Sonnet 102 should hold
Our love was new, and then but in the spring,
When I was wont to greet it with my lays;
As Philomel in summer's front doth sing,
And stops her pipe in growth of riper days.
But such is not the case. Not summer's bloom lies ahead of us, but rather a polar night of icy darkness and hardness, no matter which group may triumph externally now. ... When this night shall have slowly receded, who of those for whom spring apparently has bloomed so luxuriously will be alive? And what will have become of all of you by then? Will you be bitter or banausic? Will you simply and dully accept world and occupation? Or will the third and by no means the least frequent possibility be your lot: mystic flight from reality for those who are gifted for it, or--as is both frequent and unpleasant--for those who belabor themselves to follow this fashion? In every one of such cases, I shall draw the conclusion that they have not measured up to their own doings. They have not measured up to the world as it really is in its everyday routine. Objectively and actually, they have not experienced the vocation for politics in its deepest meaning, which they thought they had. They would have done better in simply cultivating plain brotherliness in personal relations. And for the rest--they should have gone soberly about their daily work.

Gregory - thanks for the full quote. I would not characterize Weber as being "dragged in to this debate". Weber is the "center" of the public and business policy, OB and political philosophy literature concerning the state (Leviathan), its authority and the larger question of legitimacy. Thus, I do not accept your interpretation that Weber is incidental or tangential to discussions of the role of the state and regulation thereto. Entire forests have been cut down over the past century to publish theses and journal articles that unpacked this common understanding of Weber that I mentioned

I agree with Prof Eckstein re Weber and the Politics article (as well as its companion article, Science [i.e. the academy], as a Vocation). In fact, I urge my students who have expressed an interest in entering politics before they have established themselves in some other walk of life, to read this article before so embarking.

Expanding on that thought, every business and economics prof and student should read:

Weber, The Protestant Ethic and the Spirit of Capitalism and Schumpeter, Capitalism, Socialism and Democracy for two of the most rigorous exegeses of what capitalism is and is not, as they are in sharp contrast with common (vulgar) understandings today of capitalism and the market economy.

Determinant: you said “I believe that the last check before a disaster is the loan officer's pen”.

Actually, the lender is the first check, backstopped by bank internal policies and procedures (ten 3 ringed binders i.e. Volume I through Volume X of approx. 3 inches thick each when I was in the bank) which are then backstopped by Internal Audit who report to the executive management team which are backstopped by OSFI and all of this is intermediated by the capital markets where bank shares are traded and capital is raised via equity or debt.

Moreover, as part of the rigorous ongoing annual internal credit training that every lender had to complete, the lenders had to study key sections of the Bank Act. Mid-level bank lenders had a very CLEAR understanding of the Bank Act and the regulations thereto. We deeply understood the nature and extent of the regulators’ intent in terms of what was critically important versus less important issues.

A good friend of mine was a corporate finance prof (now retired) who with several others started a small bank in Seattle in the 1980s. He told me on several occasions that throughout the late 1990s and into the new decade, bankers had a very clear understanding that “Washington” and the regulators tolerated and indeed encouraged less stringent underwriting standards in order to qualify more people for mortgages. There was no misunderstanding on their part.

This is why I find Black Box Casino so compelling. He does NOT give a pass to the banks nor the regulators or worst of all, the legislators, who were “co-drivers” of the getaway car (my phrase). It is simply profoundly naïve to think that hundreds of billions of dollars and hundreds of thousands of completely unqualified mortgage applicants were approved across the country for almost 10 years – and narry a soul in Washington or the Congress knew a thing. These are fairy tales or what you call the “meme” of progressive thinkers (four legs good, too legs bad).

One comment I want to make is when you start talking about things like Accounting Standards, OTC Derivatives, Corporate Governance etc in the Canadian context is to realize that notwithstanding the significant prudential authority the Federal govt has over chartered banks almost all of these areas at least currently fall under provincial jurisdiction. Now there are agreements such as Hockin-Kwinter that govern the "interties" so to speak between areas of provincial and federal financial law however they generally exist to further the feds interest in prudential soundness. What I think is interesting in the America vs Canada context is how the governing class in the US seems to be much more interested in "business conduct" regulation implemented through US agencies such as the SEC, CFTC, and CFPB whereas in Canada the focus is much more on prudential regulation implemented by OSFI.

"The fault, dear Brutus, is not in our stars,
But in ourselves, that we are underlings."

And whose is the last signature to go on the paper before the loan document is issued?

I refer you to Patrick's excellent citation.

I am afraid, dear Ian, that I find that your thesis is part of the Great Misinterpretation, or something to that effect. I really don't want to try Stephen to tears. Both steve and patrick have produced excellent sources and overarching narratives that counter your argument from top to bottom. I hope my position is clear and that the first place to look is the self-responsibility of the banks and financial firms.

Just because everybody is jumping off a cliff is no justification for you to jump too is the best summary I can offer. Else I fear I am going to repeat myself endlessly.

Ian, I'm glad to hear that you recommend "Politics as a Vocation" and other works by Weber to your students, since I had the impression that he was somewhat out of fashion these days. (The essay itself is all the more extraordinary for being prepared on short notice to placate a group of students who threatened to invite Kurt Eisner to speak to them instead of Weber if Weber turned them down.) And I have no doubt of Weber's influence, conscious or unconscious, on a wide range of academic disciplines. However, I do object in a nit-picky way to how often his masterful definition of the state is taken out of context and applied to any subject at hand. When I lived in Japan I once ran across a prominent and militaristic right wing professor who claimed that Japan's renunciation of offensive military operations meant that, according to Weber, Japan was therefore not a state at all!

I would only add that not enough people read his major works on India, China and ancient Judaism that constitute his grand project; the classic essay on the Protestant Ethic fits in as a small but important part of this sweeping survey of human history.

Gregory - I regretfully confess that I have not read his works on India, China and ancient Juadism (which I have read are remarkable), as my doctoral studies were in Public policy (and public economics) and Political Philosophy. Thus, we focused on issues of sovereignty, legitimacy, role of the state - Hobbes, Hegel, Weber, Schumpeter (and the incomprehensibly brilliant Hannah Arendt eg On Revolution and The Origins of totalitarianism).

Some of the happiest days of my life was as a "reading machine" for 2 years in 1984 and 1985 preparing for my PhD Comp Exams. I rarely left my home living the life of a monk or what Arendt called "the life of the mind". I got up every morning before 6 am and read until midnight when I went to sleep. I never read so much before or since - the deepest and most brilliant minds - in what Chicago's Leo Strauss called the great books of the western philosophical tradition.

That is when I discovered the genius of Weber. One of my Comp Exam profs insisted I had to read Marx for a Comps Exam question covering the Grundrisse, the Economic and Philosophical Manuscripts and Kapital. Each day I became more angry at this long dead bitter man's resentiment and deep misunderstanding of capitalism. So I went looking for critical deconstruction and quickly discovered Weber, Schumpeter and Arendt.

The word "profound" is possibly used far too often today. But Weber's understanding and flashes of insight are simply breath taking. When I retire, I will return to Weber on Judaism and Asia.

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