Explanations for the latest economic crisis have ranged from simple greed to the madness of crowds to a failure of government policy. Each probably played a role, Cassidy said, but economic thought was at the center of the failure. "This crisis was ultimately caused by good ideas, misapplied," he said.
Poor regulatory policy and poor monetary policy helped to set up a housing market in which individually rational decisions generated a collectively irrational outcome, Cassidy said.
Subprime borrowers made a rational choice to enter a market that had previously excluded them, believing they had little to lose. Lenders who earned commissions had an incentive to make loans -- and little long-term accountability, since the mortgages were resold. The role of Wall Street banks is less clear, Cassidy said. They may have believed there was no housing bubble, or they might have just thought they could get out of the market before it failed.
While banks did have dissenters in their executive suites, Cassidy said, few had played a meaningful role. "All the bears were fired before the bubble burst," he said. "They were right, of course, but they were sitting in Florida by that point."