Greed and Stupidity

A few days ago David Brooks wrote a helpful summary of two competing views on why the economy went bust. On the one hand, Simon Johnson's take on the problem is that the banks got too big, and a few oligarchs ruled. On the other hand, as Felix Salmon and Jerry Z. Muller argue, overconfidence in the formulas used to assess risk led to an inflation of stupidity in the market. Brooks concludes: 

"Both schools agree on one thing, however. Both believe that banks are too big. Both narratives suggest we should return to the day when banks were focused institutions — when savings banks, insurance companies, brokerages and investment banks lived separate lives."

This is a really important point and offers a helpful supplement to what I cited a few months ago here. Having said that, I'm not convinced, as Brooks argues, that we must in fact choose between these two theories. Rather, it seems to me that policy makers will need to take both into account as they navigate a mix of solutions to prevent similar crashes in the future.