I find the writer's explanation of the main cause of the financial crisis too simplistic and dangerously naive: "interest rates were historically low which made lending cheap, [so] banks had more money to lend than there were responsible borrowers. This created a credit bubble that once over, resulted in banks suffering large monetary losses and an atmosphere of being scared to lend to each other."
IMHO, the structure and behavior of financial firms was a major destabilizing force leading to the crisis.
In the years preceding the crisis, financial firms created a vast network of complex financial claims and obligations of their own that greatly exceeded the real economy’s needs. These financial claims and obligations were at the center of the financial crisis.
Instead of just providing a mundane but critical service to the real economy (interconnecting the real economy's savers with its borrowers), the financial system was driving the real economy – for instance, by pushing up the prices of many assets, particularly residential properties, simultaneously feeding on and magnifying a housing bubble of historic proportions.
IMHO, these nonlinear feedback loops and network-amplification effects -- typical of complex, tightly interconnected, dynamic systems -- were important root causes.
IMHO, the structure and behavior of financial firms was a major destabilizing force leading to the crisis.
In the years preceding the crisis, financial firms created a vast network of complex financial claims and obligations of their own that greatly exceeded the real economy’s needs. These financial claims and obligations were at the center of the financial crisis.
A recent working paper at the Bank of International Settlements shows that financial flows exceeded the real economy's needs by a factor of at least 60 (!): http://www.bis.org/publ/work346.pdf -- an irreverent translation of the paper in easy-to-understand lay language is available here: http://www.nakedcapitalism.com/2011/09/the-very-important-an... .
Instead of just providing a mundane but critical service to the real economy (interconnecting the real economy's savers with its borrowers), the financial system was driving the real economy – for instance, by pushing up the prices of many assets, particularly residential properties, simultaneously feeding on and magnifying a housing bubble of historic proportions.
IMHO, these nonlinear feedback loops and network-amplification effects -- typical of complex, tightly interconnected, dynamic systems -- were important root causes.