laxed
lending standards. Homeowners with weak credit histories could refinance loans on more favorable terms in two or three years because
the value of their houses would have risen. If borrowers defaulted
lenders could recover their money because the homes would be worth
more
The paradox is that, thinking the world less risky, people took
actions that made It more nsky. The pleasures of prosperity bred
carelessness. If regulation was loose, the main reason was that
regulators-like the lenders, investors, and borrowers they supervised
shared the conventional wisdom. Markets seemed to be working. Why
interfere? That was the lesson of experience, not an abstract devotion
to the theory of "efficient markets, "as is now increasingly argued
Unless we get the story of the crisis right, we may be
disappointed by the upcoming consequence. The boom-bust explanation
does not exclude greed, shortsightedness, or misguided government
policies. But it does help explain them. It doesnt mean that we
can't-or shouldn't-take steps to curb dangerous risk taking. Greater
capital requirements would protect banks from losses; the ability to
control the shutdown of large, failing financial institutions might avoid
chaos of the Lehman Brothers collapse; moving the trading of
derivatives to exchanges would create more transparency in
financial markets. But it's neither possible-nor desirable-to regulate
away all risk. Every bubble is not a potential depression, Popped
bubbles and losses must occur to discourage speculation and compel
ivestors to evaluate risk. Finally, a single-minded focus on the
lyall Stret may also distract us from other possible
