SOMEONE ELSE WHO GOT IT RIGHT

(h/t Atrios)

In August 2005, Raghuram Rajan, a professor at U. of Chicago's B-School, delivered a paper at an Alan Greenspan love fest at Jackson Hole which warned of the coming Crunch and was roundly criticized because "A dangerous all-or-nothing orthodoxy had come to dominate the policy debate, where one was either for free markets or against them." The "all or nothing" sounds exactly like wingnut "Us vs. Them" thinking.

Mr. Rajan Was Unpopular (But Prescient) at Greenspan Party
U.S. NEWS JANUARY 2, 2009
By JUSTIN LAHART
Wall Street Journal

Mr. Rajan, a professor at the University of Chicago's Booth Graduate School of Business, chose that moment to deliver a paper called "Has Financial Development Made the World Riskier?"

His answer: Yes.

Incentives were horribly skewed in the financial sector, with workers reaping rich rewards for making money, but being only lightly penalized for losses, Mr. Rajan argued. That encouraged financial firms to invest in complex products with potentially big payoffs, which could on occasion fail spectacularly.

He pointed to "credit-default swaps," which act as insurance against bond defaults. He said insurers and others were generating big returns selling these swaps with the appearance of taking on little risk, even though the pain could be immense if defaults actually occurred.

Mr. Rajan also argued that because banks were holding a portion of the credit securities they created on their books, if those securities ran into trouble, the banking system itself would be at risk. Banks would lose confidence in one another, he said: "The interbank market could freeze up, and one could well have a full-blown financial crisis."