The key to understanding the "Basel thesis" about the cause of the crisis, advanced in Critical Review's special issue on the crisis by coauthors Viral Acharya & Matthew Richardson, and by coauthors Juliusz Jablecki & Mateusz Machaj, as well as by Wladimir Kraus and me in our forthcoming Engineering the Perfect Storm: Banking Regulation, Capitalism, and Systemic Risk (University of Pennsylvania Press, 2010), is to understand one thing: The bursting of the housing asset bubble would not, alone, have caused (1) a financial crisis, and thus probably would not have caused (2) a worldwide recession of such depth.
This is also a point made by the other coauthor team in Critical Review's special issue, Steven Gjerstad and Nobel laureate Vernon L. Smith. Asset bubbles pop all the time, but worldwide financial crises are rare.
A financial crisis is a banking crisis. So why did the bursting of the asset bubble in housing cause a banking crisis, freezing interbank lending and then bank lending into the "real" economy?
Because, according to the Basel thesis, Basel I bank-capital regulations, enhanced in 2001 in the United States by the Recourse Rule, encouraged banks worldwide and especially in the United States to leverage into asset-backed securities, including mortgage-backed securities, that were either government guaranteed (by Fan or Fred) or were privately issued but had an AA or AAA rating. How did the Basel rules encourage this? By giving such securities a 20 percent risk weight.
Translation: An AAA-rated mortgage backed security worth $100 required only $2 in bank capital at the 8 percent Basel rate for adequately capitalized banks. $100 x .08 x .20 (the 20 percent risk weight assigned to asset-backed securities by the Recourse Rule) = $2. By contrast, a commercial loan of $100 required $8 of bank capital, because Basel gave such loans a 100 percent risk weight. $100 x 8 percent x 1.00 = $8. Similarly, a $100 whole mortgage retained by the bank required $4 of capital, because the Basel risk weight for unsecuritized mortgages was 50 percent. With these risk weightings, securitized mortgage-backed debt offered significant capital relief.
Today's FT brings the news that "European financial institutions have $235 billion worth of claims on Greek debt, most of which is thought to be in government bonds." Why do they hold so much Greek government debt? Because under Basel II, implemented (outside the United States) in 2007, Greek government bonds, rated A-, had the same 20 percent risk weight as AA/AAA asset-backed securities in the United States. That is, until S&P downgraded Greek debt from A- to BBB+. That raised the risk weight to 50 percent, suddenly requiring 60 percent more capital from banks holding Greek bonds.
This appears to be the reason that the possibility of Greek default has led to fears of another banking crisis.
Tuesday, February 16, 2010
Saturday, February 13, 2010
Too Big to Fail: The Evidence
Ironically, Cafe Hayek takes issue with my Austrian claim that bankers were (in general) ignorant of the risks they were taking, hence could not have been taking these risks due to their knowledge that they were "too big to fail" and thus would be bailed out. Or at least I think that's what Russ Roberts is suggesting, because he is disputing what I said, and what I said is that TBTF did not cause the crisis--not that the thought of a bailout never crossed any bankers' minds. (If I were one of them and it crossed my mind, however, I would have said to myself: "Maybe. But I'm not going to count on it.")
Roberts cites a speech by Andrew Haldane,an official of the Bank of England, who claims that at an undated meeting of unnamed bankers, an unnamed individual said that bankers had no incentive to run severe stress tests because in a severe event, they would lose their jobs and then "the authorities would have to step in."
Props to Russ for this interesting evidence, which I hadn't seen before. But it's not exactly unambiguous.
Consider a banker who, as posited in the anonymous scenario, thinks that a disastrous financial situation would get him fired. What difference would it make to this allegedly self-interested banker that the bank would subsequently be bailed out?
Of course, as the bailouts actually unfolded, the bankers did not get fired in many cases--but according to Haldane's anecdote, the bankers did not know that in advance.
So, as I said, when it comes to the TBTF, corporate-compensation, and ABCT theories of the crisis, we're in a high-conviction, low-evidence zone. However, we are not in an evidence-free zone. Consider, on TBTF:
1. Many banks that were too small to be bailed out (except by the FDIC, in which case the bankers would definitely be fired) invested in the same AAA-rated MBS as the big banks that got bailed out.
2. Commercial bankers like Sandy Weill and investment bankers (e.g., Jimmy Cayne, Ralph Cioffi, and Matthew Tannin at Bear Stearns) lost many millions--in Weill and Cayne's case, $1 billion each--because they were fully invested in their banks' stock right up to the end.
Cafe Hayek quotes Cayne: "The only people [who] are going to suffer are my heirs, not me. Because when you have a billion six and you lose a billion, you’re not exactly like crippled, right?" What is the point of this quotation: That Cayne didn't care about his heirs, so he didn't care about losing $1 billion, so that's why he knowingly allowed Bear Stearns to take risks that led to its collapse?
That is certainly not the implication of the passage when it is read in context.
3. If one reads the rest of the book from which the quotation is drawn, one finds that Cayne was consumed by the construction of a new skyscraper headquarters for Bear Stearns that would symbolize the permanence of the success of this once-underdog, scrappy, Jewish firm. Is it really plausible that Cayne would risk that success, his life's legacy, because, in the event that the risk brought down Bear Stearns, the firm might get bailed out (by being absorbed, in the event, into arch-rival JP Morgan)?
Similarly, as I document in my introduction to the Critical Review financial-crisis issue, Cioffi and Tannin, who were the only ones at Bear Stearns who actually knew what was going on, revealed in secret emails to each other (discovered by the FBI) that they were true believers in the accuracy of the triple-A ratings. They were mistaken.
Again, as the crisis unfolded, all the books on the crisis show that the principals were shocked, frantic, and bewildered. If they had deliberately taken risks because they had a bailout in the back of their minds, would they not have have reacted with knowing cynicism and serenity?
(More documentation will appear in the revised introduction to the book version of Critical Review's financial-crisis issue, The Causes of the Financial Crisis, forthcoming from the University of Pennsylvania Press.)
4. I'm still waiting for somebody to explain why these bankers who were supposedly insensitive to risk--due to being TBTF, or due to their compensation incentives--bought government-guaranteed or AAA-rated MBS 93 percent of the time.
AA-rated MBS were riskier, paid higher returns, and got exactly the same capital relief as AAAs. They would have been the MBS of choice if both the capital-relief theory of the crisis, which I favor, and the TBTF or corporate-compensation theories of the crisis were true. Subtract the capital-relief motive, though, and BBB or lower-rated securities would have been the choice. But never, ever, AAAs.
I submit that the bankers--like the regulators--simply did not realize that this was the first-ever significant nationwide housing bubble. And they did not realize how fragile the bubble was, due to subprime lending. Meanwhile, the Basel regulators encouraged them to leverage into the bubble by buying AA- or AAA-rated MBS. That is the crisis in three easy sentences.
The crisis has ideological ramifications. So economists of libertarian bent want to blame it on TBTF. Those of leftist bent want to blame it on bankers greedy for bonuses. Is it so difficult to imagine, though, that both the regulators and the bankers, being human, were ignorant of what was to come?
That, I think, is what Hayek might have said.
Roberts cites a speech by Andrew Haldane,an official of the Bank of England, who claims that at an undated meeting of unnamed bankers, an unnamed individual said that bankers had no incentive to run severe stress tests because in a severe event, they would lose their jobs and then "the authorities would have to step in."
Props to Russ for this interesting evidence, which I hadn't seen before. But it's not exactly unambiguous.
Consider a banker who, as posited in the anonymous scenario, thinks that a disastrous financial situation would get him fired. What difference would it make to this allegedly self-interested banker that the bank would subsequently be bailed out?
Of course, as the bailouts actually unfolded, the bankers did not get fired in many cases--but according to Haldane's anecdote, the bankers did not know that in advance.
So, as I said, when it comes to the TBTF, corporate-compensation, and ABCT theories of the crisis, we're in a high-conviction, low-evidence zone. However, we are not in an evidence-free zone. Consider, on TBTF:
1. Many banks that were too small to be bailed out (except by the FDIC, in which case the bankers would definitely be fired) invested in the same AAA-rated MBS as the big banks that got bailed out.
2. Commercial bankers like Sandy Weill and investment bankers (e.g., Jimmy Cayne, Ralph Cioffi, and Matthew Tannin at Bear Stearns) lost many millions--in Weill and Cayne's case, $1 billion each--because they were fully invested in their banks' stock right up to the end.
Cafe Hayek quotes Cayne: "The only people [who] are going to suffer are my heirs, not me. Because when you have a billion six and you lose a billion, you’re not exactly like crippled, right?" What is the point of this quotation: That Cayne didn't care about his heirs, so he didn't care about losing $1 billion, so that's why he knowingly allowed Bear Stearns to take risks that led to its collapse?
That is certainly not the implication of the passage when it is read in context.
3. If one reads the rest of the book from which the quotation is drawn, one finds that Cayne was consumed by the construction of a new skyscraper headquarters for Bear Stearns that would symbolize the permanence of the success of this once-underdog, scrappy, Jewish firm. Is it really plausible that Cayne would risk that success, his life's legacy, because, in the event that the risk brought down Bear Stearns, the firm might get bailed out (by being absorbed, in the event, into arch-rival JP Morgan)?
Similarly, as I document in my introduction to the Critical Review financial-crisis issue, Cioffi and Tannin, who were the only ones at Bear Stearns who actually knew what was going on, revealed in secret emails to each other (discovered by the FBI) that they were true believers in the accuracy of the triple-A ratings. They were mistaken.
Again, as the crisis unfolded, all the books on the crisis show that the principals were shocked, frantic, and bewildered. If they had deliberately taken risks because they had a bailout in the back of their minds, would they not have have reacted with knowing cynicism and serenity?
(More documentation will appear in the revised introduction to the book version of Critical Review's financial-crisis issue, The Causes of the Financial Crisis, forthcoming from the University of Pennsylvania Press.)
4. I'm still waiting for somebody to explain why these bankers who were supposedly insensitive to risk--due to being TBTF, or due to their compensation incentives--bought government-guaranteed or AAA-rated MBS 93 percent of the time.
AA-rated MBS were riskier, paid higher returns, and got exactly the same capital relief as AAAs. They would have been the MBS of choice if both the capital-relief theory of the crisis, which I favor, and the TBTF or corporate-compensation theories of the crisis were true. Subtract the capital-relief motive, though, and BBB or lower-rated securities would have been the choice. But never, ever, AAAs.
I submit that the bankers--like the regulators--simply did not realize that this was the first-ever significant nationwide housing bubble. And they did not realize how fragile the bubble was, due to subprime lending. Meanwhile, the Basel regulators encouraged them to leverage into the bubble by buying AA- or AAA-rated MBS. That is the crisis in three easy sentences.
The crisis has ideological ramifications. So economists of libertarian bent want to blame it on TBTF. Those of leftist bent want to blame it on bankers greedy for bonuses. Is it so difficult to imagine, though, that both the regulators and the bankers, being human, were ignorant of what was to come?
That, I think, is what Hayek might have said.
Thursday, February 11, 2010
Another Good Thing about Austrian Economics
Bill Woolsey draws attention in the comments to the Austrian emphasis on malinvestment, as opposed to the mainstream preoccupation with aggregate investment levels.
That certainly does seem like an important theoretical contribution (but I am a mere political scientist).
But is it a contribution to understanding the causes of the 2008 financial crisis? I thought the mechanism of malinvestment is supposed to be the low interest rates themselves, not laws that encouraged housing investment, such as those pointed to by Gjerstad and Smith and Wallison.
I'd love to be corrected if I am wrong about that, and also about whether any empirical work has been done to test the ABCT hypothesis regarding what caused the financial crisis.
That certainly does seem like an important theoretical contribution (but I am a mere political scientist).
But is it a contribution to understanding the causes of the 2008 financial crisis? I thought the mechanism of malinvestment is supposed to be the low interest rates themselves, not laws that encouraged housing investment, such as those pointed to by Gjerstad and Smith and Wallison.
I'd love to be corrected if I am wrong about that, and also about whether any empirical work has been done to test the ABCT hypothesis regarding what caused the financial crisis.
Against the New Consensus
For what it is worth, here is Wladimir's and my response to the new consensus: "A Silver Lining to the Financial Crisis: A More Realistic Understanding of Capitalism." In it, we move from a rebuttal of the Corporate Compensation Myth to an explanation of the homogenizing effect of capital regulations that privileged Fannie, Freddie, or AAA/AA-rated private-issue mortgage-backed securities; and we contrast regulatory homogenization against the normal situation in markets, namely competition among businesses with heterogeneous interpretations of what they should do to make profits and avoid losses. That heterogeneity, we maintain, is the chief justification of capitalism, and the best insurance against systemic risk.
From Diversity to Consensus, and Austrian Economics
The most shocking result of having researched the causes of the financial crisis for the last year and a half is this discovery: economists have no compunctions about answering empirical questions, such as what caused the specific crisis of 2008, with general theoretical models, whether macro- or micro- in nature, that may or may not have any applicability to the actual historical event at hand. The possibility that a good model may not be applicable in a specific circumstance never seems to cross their minds.
Or, to put it differently (since we all use models): economists seem particularly uninterested in testing their hypotheses against evidence. Why do that, if all economic models express "universal laws"?
During the first year after the peak of the crisis in September 2008, however, a positive side effect of the economists' apriorism was that it produced several different hypotheses that, in this case, were relatively easy to test against evidence.
For instance, there was the Austrian business-cycle theory. But it runs up against two (not necessarily fatal) questions when it is applied to the specific crisis at hand: "Why housing?" and "Why a banking crisis?"
I.e., if low interest rates were the cause of the crisis, why wasn't there a general overinvestment in capital goods, as the Austrian theory predicts? In fact, there was an overinvestment in housing, a labor-intensive good with a short production period (roughly 3 months). Why not, instead, an overproduction of jet airplanes or skyscrapers?
One may supplement the Austrian theory with explanations such as Stephen Gjerstad and Vernon Smith's Critical Review focus on the favorable tax treatment given to home-equity capital gains, or Peter Wallison's Critical Review focus on federal housing policy, which, via Fannie Mae and Freddie Mac, added to low interest rates even more favorable terms for home buyers (e.g., no down payments).
But then we aren't really talking about a specifically Austrian theory any more: nearly everyone, of every theoretical stripe, blames low interest rates as a facilitating condition of the crisis. And while low interest rates may (perhaps) have been necessary, they were not sufficient, to cause the crisis. And they did not operate in the specifically Austrian fashion of boosting spending on more "roundabout" methods of production.
Moreover--why should a housing crisis have turned into a banking crisis?
Brian S. Wesbury's new book, It's Not as Bad as You Think (Wiley 2010), demonstrates that the collapse of housing did not cause the recession. It was the banks' overinvestment in mortgage-backed bonds, whose value was called into question during the panic of September 2008, that caused the recession--by freezing bank lending. There is no known macroeconomic explanation for the banks' purchases of these bonds; so it must have been caused by institutional or microeconomic factors.
Nonetheless, some "Austrians" continue to push "the Austrian" theory, even though that theory is but a minor aspect of the rich Austrian legacy.
Back when I received an informal education in Austrian economics in New York City in the mid-1980s (via Israel Kirzner and Don Lavoie), and then, more intensively, through editing them and virtually every other Austrian economist in Critical Review in the early 1990s, Austrian business-cycle theory was seen by Austrians as an embarrassment. The distinctive thing about "Austrian" economics, it was thought, was not business-cycle theory but the Austrian focus on human ignorance.
This focus is evident in the best explicitly Austrian books ever written: Lavoie's Rivalry and Central Planning: The Socialist Calculation Debate Reconsidered (CUP 1985) and Mario Rizzo and Gerald P. O'Driscoll's The Economics of Time and Ignorance (2nd ed. Routledge 1996). This tradition continues with Amar Bhide's forthcoming masterpiece, A Call to Judgment: Sensible Finance for a Dynamic World (OUP 2010), which attributes the crisis to the spread of mistaken theories of finance, such as the Capital Asset Pricing Model.
Karen Vaughn's Austrian Economics in America (CUP 1998) is a challenging, exciting history of this epistemically oriented Austrian economics, now largely abandoned. Most Austrians have now, sadly, adopted (perhaps due to the influence of Public Choice theory) the mainstream economists' obsession with rational-choice game theory (the strategic interaction of knowledgeable self-interested agents), which tends to reduce error to perverse incentives rather than genuine ignorance. So all that Austrians have left to distinguish themselves from the mainstream is Hayek's old business-cycle theory, which may or may not explain some business cycles but does not seem sufficient to explain this one.
Meanwhile, non-Austrian economists have gravitated toward two game-theoretic "moral hazard" stories that fit with their predisposition to reduce human error to misaligned incentives.
First, the moral hazard of "too big to fail" (TBTF). Empirical problem: Before the bailouts, nothing of this scale had ever happened, so no bank could have been sure they would be bailed out. And if one actually reads accounts of the decision making in the years leading up to the crisis, such as Gillian Tett's Fool's Gold and William D. Cohan's House of Cards, no decision makers factored bailouts into their calculations. Why? Because they didn't think they were doing anything particularly risky (an ignorance-based human error), so they didn't even consider the chances of being bailed out.
Second, the moral hazard of "corporate compensation systems," i.e., bonuses.
Empirical problem #1: When this theory took hold, there was virtually no evidence for it (whereas now there is one study for it and one against it)--see Wladimir's and my post on the topic (below).
Empirical problem #2: There was, and remains, the following overwhelming evidence against the theory: 93% of the banks' mortgage-backed securities were either guaranteed by the U.S. government (i.e., Fannie and Freddie) or were rated AAA--the "safest" and lowest-yielding securities available. Triple-A bonds are the last thing revenue-seeking, bonus-hungry, risk-indifferent (i.e., risk-knowledgeable, rather than risk-ignorant) bankers would have bought.
Yet now the Corporate Compensation Myth is the hegemonic story of the crisis, all but universally accepted by financial journalists, politicians, regulators--and scholars.
Why? Because it fits the scholars' rationalistic predilection for incentives stories that reduce an apparently widespread error to the knowing, deliberate actions of selfish actors--i.e., "greedy bankers." And guess what? That is exactly the simplistic model that journalists, politicians, and the general public are inclined to believe, evidence or not.
Or, to put it differently (since we all use models): economists seem particularly uninterested in testing their hypotheses against evidence. Why do that, if all economic models express "universal laws"?
During the first year after the peak of the crisis in September 2008, however, a positive side effect of the economists' apriorism was that it produced several different hypotheses that, in this case, were relatively easy to test against evidence.
For instance, there was the Austrian business-cycle theory. But it runs up against two (not necessarily fatal) questions when it is applied to the specific crisis at hand: "Why housing?" and "Why a banking crisis?"
I.e., if low interest rates were the cause of the crisis, why wasn't there a general overinvestment in capital goods, as the Austrian theory predicts? In fact, there was an overinvestment in housing, a labor-intensive good with a short production period (roughly 3 months). Why not, instead, an overproduction of jet airplanes or skyscrapers?
One may supplement the Austrian theory with explanations such as Stephen Gjerstad and Vernon Smith's Critical Review focus on the favorable tax treatment given to home-equity capital gains, or Peter Wallison's Critical Review focus on federal housing policy, which, via Fannie Mae and Freddie Mac, added to low interest rates even more favorable terms for home buyers (e.g., no down payments).
But then we aren't really talking about a specifically Austrian theory any more: nearly everyone, of every theoretical stripe, blames low interest rates as a facilitating condition of the crisis. And while low interest rates may (perhaps) have been necessary, they were not sufficient, to cause the crisis. And they did not operate in the specifically Austrian fashion of boosting spending on more "roundabout" methods of production.
Moreover--why should a housing crisis have turned into a banking crisis?
Brian S. Wesbury's new book, It's Not as Bad as You Think (Wiley 2010), demonstrates that the collapse of housing did not cause the recession. It was the banks' overinvestment in mortgage-backed bonds, whose value was called into question during the panic of September 2008, that caused the recession--by freezing bank lending. There is no known macroeconomic explanation for the banks' purchases of these bonds; so it must have been caused by institutional or microeconomic factors.
Nonetheless, some "Austrians" continue to push "the Austrian" theory, even though that theory is but a minor aspect of the rich Austrian legacy.
Back when I received an informal education in Austrian economics in New York City in the mid-1980s (via Israel Kirzner and Don Lavoie), and then, more intensively, through editing them and virtually every other Austrian economist in Critical Review in the early 1990s, Austrian business-cycle theory was seen by Austrians as an embarrassment. The distinctive thing about "Austrian" economics, it was thought, was not business-cycle theory but the Austrian focus on human ignorance.
This focus is evident in the best explicitly Austrian books ever written: Lavoie's Rivalry and Central Planning: The Socialist Calculation Debate Reconsidered (CUP 1985) and Mario Rizzo and Gerald P. O'Driscoll's The Economics of Time and Ignorance (2nd ed. Routledge 1996). This tradition continues with Amar Bhide's forthcoming masterpiece, A Call to Judgment: Sensible Finance for a Dynamic World (OUP 2010), which attributes the crisis to the spread of mistaken theories of finance, such as the Capital Asset Pricing Model.
Karen Vaughn's Austrian Economics in America (CUP 1998) is a challenging, exciting history of this epistemically oriented Austrian economics, now largely abandoned. Most Austrians have now, sadly, adopted (perhaps due to the influence of Public Choice theory) the mainstream economists' obsession with rational-choice game theory (the strategic interaction of knowledgeable self-interested agents), which tends to reduce error to perverse incentives rather than genuine ignorance. So all that Austrians have left to distinguish themselves from the mainstream is Hayek's old business-cycle theory, which may or may not explain some business cycles but does not seem sufficient to explain this one.
Meanwhile, non-Austrian economists have gravitated toward two game-theoretic "moral hazard" stories that fit with their predisposition to reduce human error to misaligned incentives.
First, the moral hazard of "too big to fail" (TBTF). Empirical problem: Before the bailouts, nothing of this scale had ever happened, so no bank could have been sure they would be bailed out. And if one actually reads accounts of the decision making in the years leading up to the crisis, such as Gillian Tett's Fool's Gold and William D. Cohan's House of Cards, no decision makers factored bailouts into their calculations. Why? Because they didn't think they were doing anything particularly risky (an ignorance-based human error), so they didn't even consider the chances of being bailed out.
Second, the moral hazard of "corporate compensation systems," i.e., bonuses.
Empirical problem #1: When this theory took hold, there was virtually no evidence for it (whereas now there is one study for it and one against it)--see Wladimir's and my post on the topic (below).
Empirical problem #2: There was, and remains, the following overwhelming evidence against the theory: 93% of the banks' mortgage-backed securities were either guaranteed by the U.S. government (i.e., Fannie and Freddie) or were rated AAA--the "safest" and lowest-yielding securities available. Triple-A bonds are the last thing revenue-seeking, bonus-hungry, risk-indifferent (i.e., risk-knowledgeable, rather than risk-ignorant) bankers would have bought.
Yet now the Corporate Compensation Myth is the hegemonic story of the crisis, all but universally accepted by financial journalists, politicians, regulators--and scholars.
Why? Because it fits the scholars' rationalistic predilection for incentives stories that reduce an apparently widespread error to the knowing, deliberate actions of selfish actors--i.e., "greedy bankers." And guess what? That is exactly the simplistic model that journalists, politicians, and the general public are inclined to believe, evidence or not.
The Critical Review Book(s)
It has been a long while since anyone has posted here. One reason is that the creative frenzy of last year, in which many different ideas about the financial crisis were debated, has lapsed into a hegemonic consensus about the causes of the crisis (see next post), so there hasn't been much for us to link to.
But the other reason is that the University of Pennsylvania Press is republishing Critical Review's special issue on the crisis in book form, under the title The Causes of the Financial Crisis, and Shterna Friedman (the managing editor) and I (the editor) have had our hands full preparing the volume for republication, including a complete revision of my introduction to the issue in light of more recent developments and research.
The new book should be on sale by September and is available for discounted group purchase and, of course, classroom use. Contact me about this at edcritrev@gmail.com
Making matters worse (or better, depending on your perspective), the University of Pennsylvania Press has also commissioned Causes of the Crisis Blog editor Wladimir Kraus and me to coauthor a second book, Engineering the Perfect Storm: How Reasonable Regulations Caused the Financial Crisis, and we have been hard at work on it. Our target completion date is September 1, which would allow the book to be available for course adoption for Spring 2011.
Sorry that we have therefore been out of touch.
Jeffrey Friedman
But the other reason is that the University of Pennsylvania Press is republishing Critical Review's special issue on the crisis in book form, under the title The Causes of the Financial Crisis, and Shterna Friedman (the managing editor) and I (the editor) have had our hands full preparing the volume for republication, including a complete revision of my introduction to the issue in light of more recent developments and research.
The new book should be on sale by September and is available for discounted group purchase and, of course, classroom use. Contact me about this at edcritrev@gmail.com
Making matters worse (or better, depending on your perspective), the University of Pennsylvania Press has also commissioned Causes of the Crisis Blog editor Wladimir Kraus and me to coauthor a second book, Engineering the Perfect Storm: How Reasonable Regulations Caused the Financial Crisis, and we have been hard at work on it. Our target completion date is September 1, which would allow the book to be available for course adoption for Spring 2011.
Sorry that we have therefore been out of touch.
Jeffrey Friedman
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