Lessons from the Financial Crisis

Steven Sondheim once wrote a musical called *Merrily We Roll Along*, which starts at the end and goes to the beginning. I am going to start my talk today by borrowing that technique. I am going to start this lecture where most lectures of this sort end, by asking the question: can it happen again? Will we have another financial crisis?

Yes, we will. I can guarantee it. When President Obama and Barney Frank and Chris Dodd and Tim Geithner get up before you and say *we will put rules in place that will make sure that a crisis like this will never happen again*, you are hereby duly authorized to roll your eyes.

Why will we have another crisis? The answer has nothing to do with derivatives. It has nothing to do with home mortgages. It has everything to do with the human condition. We are psychologically incapable of preventing occasional financial crises. They say that Wall Street alternates between greed and fear—and that is true so far as it goes. But the truth is *society* fluctuates between fear and greed.

Our grandparents lived through the depression. Their entire lives were built around the memory of having endured that experience. Most of us do not remember that experience firsthand. So that memory fades, and as that memory fades, we forget what can happen. We look back from our position here in the “sophisticated” twenty-first century to the previous crisis—we think back to Dutch tulips, for instance, and we think: *what were they thinking?* That was madness.

Then you think about the South Sea Bubble. The South Sea Bubble was all about a corporation taking on the sovereign debt and getting in return a monopoly on trade. Anybody who studied this would think: *how can that possibly happen? We couldn’t do anything like that today.* But that is exactly what we have done.

You can talk about derivatives. You can talk about complicated financial vehicles as the root of this. But in truth, the financial crisis of 2008 was simply a period of madness that we went through as a society, and a lot of what I am going to talk about will be breaking down how every piece of financial society, from Wall Street to Main Street, lost its mind.