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Did Cockiness Cause the Crisis? Did the Bailout Make it Worse?

  • The Find: If Malcolm Gladwell is right and cockiness caused the financial crisis, than Business Insider thinks the bailout only made Wall Street's problems worse.
  • The Source: John Carney writing on Business Insider.

The Takeaway: Easy reading author and popular idea man Malcolm Gladwell's latest piece for the New Yorker is bound to stir up debate in the business blogosphere with its conclusion that the real cause of the currently unfolding financial crisis was overconfidence on Wall Street. On Business Insider today Malcolm mania is already having its effect and Carney weighs in, suggesting that if Gladwell is right (and Carney thinks he is), than the bailout only made matters worse.
He declares:
The "rescue" of the financial sector has been making the problem of overconfidence worse. In particular, the various guarantees--implicit and explicit--of assets and liabilities of financial firms tends to increase overconfidence.

Everyone from Fed chair Ben Bernanke to Treasury Secretary Tim Geithner has officially announced that the policy of our government is that we will not allow another Lehman Brothers, which means that the government will do whatever it takes to prevent the collapse of a large, complex, systemically important financial institution.

Not many people seem to understand that this policy makes it almost impossible for banks to competently manage their risk.

For the whole of the latest fascinating article from Gladwell, click here, and for the complete breakdown of Carney's thinking about it, check out Business Insider.

(Image of man bailing by, CC 2.0)

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