Clinton on the meltdown

Henry Farrell sat down with Bill Clinton and some other bloggers and reporters today and writes:

Clinton’s basic argument was that the crisis was one of an overleveraged Wall Street system which emphasized the volume of transactions, and in which people were rewarded for chasing risky deals, and in which there were too few good investment opportunities. Money ended up being funneled into real estate that shouldn’t have been. Clinton furthermore argued that if there had been a real clean energy policy, it would have created alternative investment opportunities in dealing with climate change – because there wasn’t such a policy, the money was ‘misspent.’ This last bit of the argument doesn’t seem entirely plausible to me – would there really have been enough investment opportunities generated by clean energy to suck up the loose cash sloshing around? – but I’ll leave it to those with more specific expertise to evaluate properly.

I'm not one with 'more specific expertise' by any stretch, but it's an interesting counterfactual and my sense is that Clinton is wrong. The problem on Wall Street was not, I don't think, that there weren't any safe places to put money and so tons of bankers put too much of it in high-risk investments. It's that tons of bankers bought into the idea that these high-risk investments were very good investments.

It's true that if clean energy incentives had been created during the Clinton years, it would have opened up a great number of good, long-term investment opportunities. But as long as there was a consensus on Wall Street that housing prices would rise indefinitely, and at such a rate that people without a whole lot of money could finance homes with increased equity, people were going to invest in the idea that the housing bubble wasn't a bubble. And then that bubble was going to burst.