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What Has Been the Most Surprising Effect of the Financial Crisis?

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Editor’s note: All this week on the Business Desk, we have been featuring contributions from economists, financial journalists, and other experts on the origins and impact of the financial crisis.

Today, we asked a few of our favorite experts who contribute frequently to the Business Desk to weigh in on the most surprising effects of the financial crisis.

Simon Johnson:

The most astonishing thing I’ve seen over the past 12 months — an incredible financial crisis — actually came Monday at President Obama’s speech in New York.

President Obama placed blame for the crisis squarely on the shoulders of the financial sector — specifically, the incentives, structure, and actions of big banks on Wall Street. He essentially acknowledged that, even under the most favorable interpretation, his regulatory reforms are proceeding slowly and — as a result — found himself forced to ask Wall Street to behave better within the existing rules.

“But not one CEO from a top U.S. bank was in attendance,” according to the Wall Street Journal.

This is incredible. After all this administration has done to save the big banks, including bending over backwards to be nice to the CEOs of these banks, not a single individual can show up for the President’s speech?

As the bank executives know, the administration had other alternatives earlier this year. Best practice around the world involves — typically at the urging of the U.S. authorities, directly and through their role at the International Monetary Fund — cleaning up failed financial institutions, including some sort of managed bankruptcy for large banks and the dismissal without golden parachute of the relevant bosses.

In contrast, the leadership of this administration decided to pursue a more cooperative and collaborative approach with the individuals who had managed their institutions (and us) into colossal crisis. This was, and still is, a questionable and controversial choice — most likely, it encourages further bad behavior on the part of the surviving behemoths.

But President Obama himself chose this approach, supporting bigger and more pro-bank CEO bailouts than the world has ever seen before.

And yet not one of these CEOs could be bothered to show up for President Obama’s speech. Arrogant bankers always mean trouble, and I’ve never before seen so much banker arrogance as was on display this week.

Simon Johnson is professor of management at MIT Sloan School of Management and senior fellow at the Peterson Institute for International Economics. He is also author of The Baseline Scenario, a popular economics blog.

Dan Ariely:

Reflecting back on our recent economic history bring to my mind a two sad surprises.

Even as a behavioral economist who generally believes in the prevalence of irrationality in our every day life, I place some stock in the main mechanism that should have maintained the efficiency of the financial markets: competition. In principle, the drive for competition among individuals, banks, and financial institutions should get the actors in the market to do the right thing for their clients as they fight to outdo their competition. After the Wall Street fiasco, I expected and hoped that in the spirit of competition some financial institutions would change their way given the new information about the risks they were talking and self-impose restrictions on themselves. I did not expect that they would do so because they were benevolent, but because they wanted to get the business of those who have lost trust in the financial institutions.

Surprise one: Sadly, the forces of competition do not seem to have any effect on the functioning of our financial institutions and Wall Street seems to be back to is pre-fiasco structure.

We are now discussing the possibility of health care reform, which arguably is even more messed up than our financial institutions (about 18 percent of GDP, bad incentives, bad intuitions, and the leading cause for bankruptcy before the current housing problem). When I look at the health care debate, it seems to be fueled by ideological beliefs about the importance of competition and freedom of choice on one hand, and the evilness of regulations and limits on the other. As someone who loves data beyond theories, it is surprising to me how little we know about the effectiveness of different versions of health care, and how sure people are in their own beliefs — which makes it an ideological and not a very useful debate (this is just a small surprise).

But what is the most surprising to me is that the tremendously expensive lessons we have experienced about the efficiency of markets and self interest do not seem to carry to the health care debate. As a society, we still seem to be enamored with the ideology of free markets, and have not seemed to update our beliefs in their efficiency despite the evidence. On the bright side, it looks like behavioral economists will have a lot of work for the foreseeable future.

Dan Ariely is professor of behavioral economics at MIT and author of Predictably Irrational: The Hidden Forces That Shape Our Decisions.

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