So, a reader here pointed me to this pamphlet. And I was going to read it all and comment in detail upon it. And then I got to this:
Modern economics is a complicated package, and there are numerous differing schools of
thought. One school maintains that nothing much went amiss at the level of mainstream
economic theory: it just needed to be better applied. Other voices claim that economics
as a science is broken and discredited, and that it needs fundamental reform. One such
voice is that of Will Hutton, economic and political commentator, who has declared that
the dominant intellectual ideology of the last 20 years, free market
fundamentalism, and the way it was applied in the financial markets, the efficient
market hypothesis, was the biggest intellectual mistake this generation has ever
witnessed, arguably the world has ever witnessed.2
Anyone who is going to quote Will Hutton, other than in derision, isn’t likely to have the right end of the stick. So I’m afraid that I only got half way down page one.
Lehman’s downfall was also part of a previous chain reaction, a key element of which
was the issuing of property mortgages on a massive scale to people who could ill afford
them – so-called “sub-prime” mortgages. They were more risky, but financiers attempted
to reduce the risk by spreading it more widely. Ultimately, however, that merely increased
the pool of people who would lose money when the mortgages proved unsustainable.
Err, no. The problem was that the banks themselves were holding portions of those CDOs, and the banks were holding them on leverage, as is always going to be true in a system of fractional reserve banking. So the problem wasn’t with sub-prime, nor mortgages, nor syndication, but with who was actually holding those notes. If it had been insurance and pension funds holding them there would have been no crash at all.
Sorry, this paper isn’t diagnosing the problem correctly therefore it’s obviously not going to get to the right conclusions.