Epic Fail

As investors all around the world ran scared this past month, their panic was about the only thing easy to understand. The global financial system was collapsing and almost nobody could say—in plain English—what exactly was fueling such a gigantic crisis. Not the president, who offered insipid generalities; nor the presidential candidates, who stuck to old themes like earmarks, taxes, and deregulation. Not even Treasury Secretary Henry Paulson, who delivered abstract lessons about liquidity and interest-rate spreads but whose plan for the government to buy "toxic assets"—loans that have little or no market value because of their lack of transparency—misfired and had to be recast as a plan to buy stakes in banks. This has been the Great Incomprehensible Recession of 2008. Incomprehensibility was at the root of the problem, and it is at the root of our difficulty getting out of it.

As the United States struggles to get past the turmoil, the challenge will be to understand its most basic causes. Did the trouble start with the Reagan agenda of deregulation? The Bush era's passive Securities and Exchange Commission and Alan Greenspan's Federal Reserve, with their loose rules governing off-the-books investments and the ratio of capital to lending by financial institutions? The flood of capital into the United States from China and the Persian Gulf? The Federal Reserve's easy money and the failure to regulate complex new derivatives? Or was it the liberal political pressure on Congress and the administration to keep interest rates low and expand homeownership recklessly through Fannie Mae and Freddie Mac? The truth probably includes some role for all these explanations. But the truth has also been radically unclear because of the difficulty in understanding the machinations and statements of the financial wizards handling our money.