This puts things in a substantially different light than popular explanations of bubbles caused by “greed” or popping from “fear”. There is something to those too: the subprime mortgages of ’08 were in fact greedy, bad decisions; the private wealth-hoarding after recessions can in fact delay recovery. But we can have the understanding that the economy will have some cyclical nature from these feedback loops no matter what, and ask the question: how stable could it be aside from this?
Treating greed as something that grows and shrinks over time and has a causative effect is a really bad model. It’s much more useful to think as greed as a renewable resource that takes advantage of opportunities when the incentives are strong and feedback loops are weak. The subprime mortgage crisis had examples of both. The CRA and congressional interference gave banks incentives to issue more loans with weaker underwriting standards. The “greedy” borrowers were taking advantage of a situation where they could more easily get a loan than at other times. Borrowers always have a higher estimate of their ability to repay than the banks do; it is the banks responsibility to draw a line somewhere.
I definitely agree with this. I think the wider populace may be considering greed as almost a circular explanation, where getting money in normal ways is fine but in ways that cause bad things is greedy, and so of course after the fact of a debt crisis their actions will be labeled as “greed.”
Treating greed as something that grows and shrinks over time and has a causative effect is a really bad model. It’s much more useful to think as greed as a renewable resource that takes advantage of opportunities when the incentives are strong and feedback loops are weak. The subprime mortgage crisis had examples of both. The CRA and congressional interference gave banks incentives to issue more loans with weaker underwriting standards. The “greedy” borrowers were taking advantage of a situation where they could more easily get a loan than at other times. Borrowers always have a higher estimate of their ability to repay than the banks do; it is the banks responsibility to draw a line somewhere.
I definitely agree with this. I think the wider populace may be considering greed as almost a circular explanation, where getting money in normal ways is fine but in ways that cause bad things is greedy, and so of course after the fact of a debt crisis their actions will be labeled as “greed.”