Becker and Posner disagree somewhat in this week's post on the financial crisis. Becker notes that:
The second relevant development has been advances in financial instruments, such as derivatives, securitization, credit-backed swaps, and other even more esoteric instruments. These instruments seemed to work quite well in managing, spreading and even reducing the risk of the assets held by banks and other institutions. However, in the process they encouraged greater risk-taking ventures, as reflected by the large increase in the leverage-that is, in the ratio of assets to capital- of banks and financial institutions like Fannie Mae and Freddie Mac. What has been insufficiently understood is that the growing use of these instruments, and the growing leverage of financial institutions, created considerable aggregate risk for the system as a whole that could not be diversified away.
Some will call this a "market failuure".
The WSJ's Mark Gongloff writes how "Policy Blunders Have Created Crisis of Faith".
It all suggests back-to-the-drawing-boards when it comes to a broad range of policies. But is there any theory available to guide this project? Public choice economics is available, but unlikely to be considered. That theory suggests that there are no panels of wise men and women available to make new and improved policy. It does suggest that the next round of policy making will be as politicized and inept as the last. Even Nobel laureates who are recognized for their skills in economic theory ignore this economic theory when placing their faith in new and improved politicians.