Over at Crooked Timber, Daniel Davies Turns into an Internet Troll... by DeLong (repost from 2011)
Why did they do this? It wasn't because, as Daniel claims, of "the disappearance of a huge amount of household sector wealth. It did disappear. But wealth had disappeared before--remember Black Monday on the stock market in 1987, or the collapse of the dot-com boom?--without it triggering a Lesser Depression. It was because people recognized that banks that were supposed to have originated-and-distributed mortgage-backed securities had held on to them instead, that as a result a large chunk of the $500 billion in subprime losses had eaten up the capital base of highly leveraged financial institutions, and that you were running grave risks if you lent to a bank. The run on the shadow banking system that followed was the source of the crash as financing for exports and for equipment investment vanished, and then the whole thing snowballed.It seems the disagreement is short-term versus long-term crisis. DeLong says it was a short-term crisis caused by a "seize up" that turned into a long-term crisis because of inadequate policies. Davies agrees their have been inadequate policies since the crisis, but wrong-headed policies before the crisis helped bring on the crisis.
No banks losing track of the risks they were running and holding on to assets that were supposed to be originate-and-distribute, no financial crisis, no credit crunch, and no Lesser Depression. The housing bubble would have deflated, unemployment would now be near 5%, exports would have boomed, and our biggest worry right now would probably be a "weak dollar".