So Wall Street is in a panic, and both Presidential candidates are running around casting blame where they think it will benefit their candidacy most.  No surprise there.  Even I've been trying to figure out what caused this.  Megan McArdle reminds me once again why she's my second favorite blogger out there (next to the obvious of course).  I think there are a lot of similarities between this financial melt down and a typical "engineering disaster" like a bridge collapse, or the Space Shuttle exploding, etc.  Rarely is there a single cause that you can point to and say "Ah ha!  If only person X had caught this mistake, none of this would have happened!"  The reality is that things like this are usually the culimination of many smaller problems, any one of which looked innocent or even correct.  But taken in combination, they lead to disaster.

Megan is on a roll today asking some very basic questions of those who would cast blame without reason.  For instance, What should Bush have done?  Seriously:

There are a whole lot of Democrats in the comments to this post who know that Bush could have and should have stopped this bubble.  They don't know what he could have done, exactly; they're not tricksy bankers.  But they've read, like, one and a half whole articles on the subject, so they're sure that this is the fault of Republican ideology.

I'm so glad that I'm voting with the reality based community this time around.

I interrupt this post to note that thanks to Bill Clinton, millions of people have died of cancer in the last ten years.  It seems to me that if he cared, he could have funded research that would have cured cancer.  What research?  I don't know, I'm not a damn doctor.  All I know is, a lot of people are dying of cancer.
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At the Federal level, we might have forbidden securitization, or more exotic instruments.  But this wasn't even on peoples' radar before the subprime market went sour.  The bank regulators could probably have done something to tighten lending standards, but this would have amounted to saying "Don't lend money to poor people".  A Democratic congress saying "don't lend money to poor people".  

Obviously, in hindsight we wish we had done this.  And in hindsight, I wish I'd played the winners at the track last weekend.  The things that might have worked were not among the solutions that were being proposed at the time. The only thing a Democrat could obviously have done differently, other than dial the psychic friends' network for economic advice, was appointed a more hawkish Federal Reserve Chair--one who was willing to tolerate higher unemployment in return for lower inflation.  That's exactly the opposite of normal Democratic policy direction.

She goes in into much further detail, so please go read it.  And while you're at it, read her take on Obama's reaction to the crisis:

This is high-test hooey.  This was not some criminal activity that the Bush administration should have been investigating more thoroughly; it was a thorough, massive, systemic mispricing of the risk attendant on lending to people with bad credit.  (These are, mind you, the same people that five years ago the Democrats wanted to help enjoy the many booms of homeownership.) Lehman, Bear, Merrill and so forth did not sneakily lend these people money in the hope of putting one over on the American taxpayer while ruining their shareholders and getting the senior executives fired.  They got it wrong.  Badly wrong.  So did everyone else.

What, specifically, should the Bush administration have done, Senator?  Don't tell me they should have beefed up SEC enforcement, since this is not a criminal problem (aside from minor lies by Bear execs after the damage was already done).   Perhaps he should not have reappointed Greenspan, or appointed Ben Bernanke?  Both moves were widely hailed at the time.  Moreover, to believe that a Democrat could have done better is to assert that a Democratic president would have found a Fed chair who would pay less attention to unemployment, or a bank regulator who would have tried harder to prevent low-income people from buying homes.  Where is this noble creature?  And why didn't Barack Obama push for him at the time?

The reality is that even my favorite cause of the crisis wasn't the only cause.  This was the perfect storm, waiting to happen... and nobody was keeping track of the radar enough to see it.