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http://www.winterspeak.com/2008/12/does-not-und...
Only if they don't have self-favoring priors, right? Or, was that implied by their being hyper-rational?
Balony. The perpetrators themselves knew what was happening, as the linked memo below shows. This idea of a need for deep intellectual analysis is all about propping an ideology. This is indeed about groping about a room with the lights on and an elephant on the couch wondering what the smell is.
Deregulation of the financial industry that allowed investment and commercial banks to merge and allowed for opaque complex finacial products like CDO's and OTC derivatives explain the results. They were the catalyst that was required for bad loans to be made and passed off up the line. Warren Buffet and others predicted this catastrphe long ago.
With out these Wall Street creations the whole massive over-leveraging never happens.
And this flow diagram doesn't flow.
Watch the NOW episode
and at 18:03 mark you'll see the answer to the above question. An internal memo from a Standard and Poor's employee dated in 2006
..."rating agencies continue to create [an] even bigger monster - the CDO [collateralized debt obligation] market. Let's hope we are all wealthy and retired by the time this house of cards falters."
Tax cuts for the rich, setting up the economy so the cash and wealth flows up while the middle class flounders and then topping it off with a deregulatory environment that leaves only speculation and ponzi schemes to continue the wealth flow a little longer repeatedly, predictably results in boom and bust cycles that are ultimatly massively economically ineffecient , undemocratic and result in reduced liberties.
Black states the obvious. People don't make ridiculously bad loans unless they can make a quick profit and pass the risk up the line. MBS's are the catalyst with financial derivatives and CDO's the super-catalyst that allows the whole chain reaction to occur. Lack of regulation and cuts to regulation allowed lax loan standards, derivatives and CDO's to flourish. These occurred specifically at the direction of Wall Street and it's army of lobbyist and politicians giving in to their every whim. Meanwhile conflict of interest, more easy money, peer pressure and stampede effect caused the rating agencies to give piles of crap AAA ratings.
No long winded explanations needed unless you have a think tank with an ideological charter to uphold and a need for papers to write.
You should really get Randal O'Toole to write another article blaming the origins of the housing bubble (though not all the finance aspects of it) on land-use planning and supply restrictions like zoning. That would add in another important factor which was probably necessary (compare TX and NC with fast growth but no bubble) but not sufficient.