Jackson Hole conference - an economist's reading of the credit crisis

I started reading the papers from the Kansas City Fed Jackson Hole conference. This annual meeting of central bankers and economists has become a must read for getting the pulse of current thinking by the Fed. This year's theme, called "Maintaining stability in a changing financial system", is no exception. The set of papers is an economist's view of the credit crisis the work provides a good mix of theory and practical analysis of the events surrounding the crisis. However, the reading makes for a grim history of policy mistakes and financial structure which has lead to a serious financial problem today. As one author states, this was the "panic of 2007" and is in the same context as the great panic of 100 years prior in 1907.

The tragedy is that the foundation for the crisis was clearly evident through the actions of the key players in the financial markets. This crisis was an a result of some economic shock that hit the housing market but a a combination of incentives and structures coupled with loose monetary policies that lead to greater risk taking than should have occurred.

Shame on the government not for doing too little after the crisis began but setting up an environment where the excesses could have occurred. This has less to do with lending practices at the point where the mortgages were originated and more to do with an environment that allowed the mispricing of risk. The cost of mispricing risk will take years to clean-up.