Conspiracy!

While reading Keynes, I tried as often as I could to draw parallels with the modern economy, especially the recent recession. After all, this recession is the largest economic collapse since the Great Depression, and contemporary economic and political debates often center around Keynesian versus conservative policies. Sure enough, there were plenty of parallels to be found between Keynes’s world and the contemporary crisis: Keynes program of expansion and Obama’s stimulus, frozen credit and banks being afraid to lend, deflation of property values, etc. As I’m wrapping up the reading, I’m almost convinced that history is repeating itself when Keynes hits me with this: “A Bankers’ Conspiracy! The Idea is Absurd!”

Absurd? In the wake of the 2008 crash, everyone was clamoring about how the banks were to blame because of their sub-prime mortgage schemes and credit default swaps and rigged securities ratings. The media portrayed these behaviors as reckless at a minimum, and a full-blown conspiracy was certainly not out of the question. Perhaps the banks didn’t honestly believe the crash ever would happen, but there is a strong case to be made that they knew it could happen. Books and movies like Inside Job, All the Devils are here, and Too Big to Fail (among others) depicted Wall Street bankers as greedy and shortsighted, ignoring the potential hazards of their actions.

Obviously there is no incentive for them to conspire to purposefully cause such a meltdown, since banks stand to lose wealth along with everyone else, but the media, along with congressional hearings and reports in which the banks were repeatedly chastised, gave the public the impression that the banks knew what they were doing, playing Russian Roulette with the credit system, and were borderline conspiratorial.

Given so many parallels between the past and present crises, why would Keynes think it so absurd that misconduct by banks could have led to the crash? Is it because banks back then weren’t as big, integrated and advanced to pull off such a scheme? Or, did Keynes simply not have the resources to uncover how decentralized, and often implicit, practices in an industry could have such a devastating effect on the economy? Or, perhaps there was no “conspiracy” that triggered the modern crisis, and our pop-media is blowing things out of proportion (wouldn’t be the first time). I'm Interested to hear all of your thoughts in class.