Whatever Happened To “Just Plain Stupid”?

This crisis is going to be analyzed to death over the coming decades, and our bookstores, libraries and B-schools will be full of books and case studies analyzing and discussing the cases. Everything from bad risk models, to derivatives, to deregulation, to lax regulatory enforcement, financial policies, the government encouraging home ownership, etc, will be blamed.

But when it comes right down to it people behaved foolishly, as they often do when there is a lot of seemingly easy money to be made. There was ample evidence that the credit bubble was going to burst and take the economy down with it, but the amount of money involved led people to invent reasons why the gravy train would go on forever.

Those reasons were known as Risk and Valuation Models, and perhaps even the personal finance books that pleaded with people to buy homes no matter what.

It’s why you have people at the big banks with the best talent, tools, access to information, etc, who are fighting to survive, while there are executives at smaller banks who  aren’t having any problems. It’s patently absurd that there isn’t a large bank that has managed to largely skirt the crisis, whilst you have small regional banks that are turning down TARP funds.

I.e. this entire crisis could’ve been prevented if people had just used some common sense and taking a more conservative approach to finance, whether they were lender, a borrower or a debt investor.

In other words while a lot of the analysis will be valid and dead on accurate, it doesn’t change the fact that the root cause was people ignoring their own common sense in favor of greed.

For the more on the role of stupidity in the credit crisis take a look at the Evanomics blog on the BBC web site, where he discusses irrationality and behavioral economics.

Disclosure: at the time of publishing the author didn’t own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn’t be viewed as financial or investment advice.

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