These things led me to underestimate the time and expense of the war
(both fiscal and in human lives), and underestimate the benefits. Maybe
history will vindicate the invasion, but I can't say this seems likely.
Onto the financial crisis, where my erroneous beliefs are probably pretty typical:
1) I recognized the housing bubble pretty early (the first mention I can find on my old blog is in 2002)--but
I had no idea it would have these kinds of broad, devastating effects.
If you had asked me in 2006 what would happen as a result, I would have
a) a wealth-effect lead recession, as consumers realized they weren't as rich as they thought
b) a decline in the construction industry
c) some bank failures.
I would not have pictured wholesale runs on the money markets, the collapse of the shadow banking system, and 10+% unemployment.
2) I believed in the "Great Moderation". That is, I believed that the
Fed and prudent fiscal policy had, to a large extent, tamed the business
cycle. I did not believe that there was even a small risk of another
Great Depression; I believed that the Fed could and would prevent the
contagion from spreading. Arguably they (and the Treasury) did, but I
did not imagine anything close to that level of intervention being
3) I believed regulators were smarter than they were. In 2004, when
the SEC decided to let the investment banks lever up to 30-to-1 instead
of 12-to-1, because after all, the SEC had the tools to quickly identify
and stop any contagion, I would have said they were probably right.
(I'm not sure I was aware of it).
4) I believed bankers were smarter than they were. Or rather, I
believed the system was smarter than it was. Individual bankers making
idiotic mistakes? Absolutely. The occasional bank being brought low?
Sure--it happens pretty regularly, in fact. But the whole banking
system taking its entire balance sheet to the roulette table and laying
it all down on a single bet? Ridiculous.
5) I expected any crisis to come from America's gaping current account
balances and its long-term entitlement problems. Again, arguably this
was true, if you believe the "Global Savings Glut" theory (I'm inclined
to). But I expected the problems to come via a currency crisis, not a
global meltdown touched off by crappy US mortgage bonds.
6) I believed that over reasonably long time-frames, modest investments in equities would allow you to retire in comfort.
7) I believed that securitization mitigated risk by spreading it around, rather than enhancing risk by reducing transparency.
8) As a corollary, I believed that on the whole, Fannie/Freddie were
harmless--not a libertarian ideal, of course, but hardly the worst thing
the US government was doing. I still don't think they were the worst
thing the US government was doing, but I think that their distortions of
the market were toxic, and have been especially so in the wake of the