There's a certain amount of moral outrage floating around in the punditocracy, looking for a solid target. The implication is that someone, or at least some small group of people, must have done this to us in the course of feeding their insatiable greed. I'm sure there will be a post-mortem in which some reporter will tell a very convincing story about how this could all have been averted if only someone had Made A Rule. It may be Bear's managers who should have done it, or the Fed, or the SEC. I don't know who the culprit will be, but I am very sure that everyone else will be very sure that Someone could have (and should have) prevented all this.

Before we enter into the orgy of blame, I'd suggest that that someone was everyone, almost. Crazy Asian people who thought America was some sort of Miracle Market sent us more money than we needed for investment, inflating an asset price bubble. The Federal Reserve, complacent after more than twenty years of tame inflation, added a little kerosene to an already blazing fire. Silly people decided that real estate prices would continue rocketing upwards forever, and took on ridiculous mortgages that they had no reasonable hope of paying off. Idiot bankers thought that their enormous brains, raffish good looks, and advanced computer models had enabled them to conquer risk.

A couple of years ago, I had dinner with an investment banker who had gone to Chicago a few years before I did. He spent a great deal of the time extolling the virtues of modern markets, proclaiming that over the last ten years, we'd become massively better at pricing risk.

Being a great fan of John Kenneth Galbraith's work on asset-price bubbles, I felt the hair go up on the back of my neck. "Are we really better at it?" I asked. "Or do we just think we are?"

"No, we're really better," he assured me. Ooops.

I mean, I think that in fact we did get a lot better at assessing credit risks--but not nearly as much better as we thought, a fact that for a long while was masked by the river of money flowing into the US from abroad. Bankers, seeing their credit models worked so well--in fact, defaults were lower than expected!--took on even more risk.

But while the bankers are in some sense the most directly culpable, they didn't behave in any fundamentally different way from millions of their fellow citizens. There were incredibly unwise decisions all the way down the chain from lenders to homebuyers, and each of those bad decisions was necessary to create the current mess. We're witnessing the ugly denoument of a sort of folie-a-millions.

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