Despite this fragility of imperfect knowledge (or perhaps because of it), no politicians have led any meaningful reforms to conclusion during the last eight years (though some have in fact tried!). Yet now most (but not all) want to climb on the bailout wagon - likely because of a perceived need to 'do something' just before the election, while attempting to attach silly blame to their opponents.

Yet it's hard to overlook the clueless observation by the chairman of the Securities and Exchange Commission,  that 'We have a good deal of comfort about the capital cushions at these firms at the moment', less than 3 days before Bear Stearns was forced into a taxpayer-funded bailout - the first of many over the next six months. In 2004, the SEC had previously (and quietly) eliminated regulations for brokerage units that limited the amount of debt they could take on, which freed up billions of dollars held in reserve as a cushion against losses on such investments. This in turn allowed these firms to invest in the fast-growing but misty world of emerging and exotic financial instruments. The five investment banks which requested that change included Goldman Sachs, which was at the time led by Henry Paulson, who subsequently become Treasury secretary. In that role, he championed a  bailout plan that did not create any value in the banking sector: it was simply a redistribution of money from the taxpayers to the investors in the major financial institutions, especially the debtholders.

There is a propensity of politicians to fingerpoint, blame, and suggest that someone has been right all along about this. Of course, hindsight is always 20-20, and apophenia abounds. The problem with most politician's analysis of our situation is that they imply that such events are unprecedented (hence in need of new action, and their meddling), while at the same time suggesting that current events could have been anticipated (despite evidence to the contrary), had they only had more concentration of power. Yet misguided monetary policies have caused serious world-wide recessions before, and it's not clear we are not doing the same this time. The current leadership has made a shift to keep otherwise insolvent banks (rather than the banking system itself) afloat. If you recapitalize firms that should be shut down, we could prolong this crisis as well.

In this context, some candidates now claim they are agents of change, suggesting that their leadership may be a critical success factor in this time of crisis. But caution is warranted, because not all candidates have a credible track record of change. The real engine that drives uncertainty in today's markets is the dynamic tension between risks and rewards that is the basis of our creative destruction cycle, which has been the engine of economic growth across the world. If that engine is stopped, the consequences are generally thought to be far worse than the medicine we face now, going forward and having to adjust to the implications of this uncertainty.

Still others claim this crisis is the result of the world telling the US to clean up it's mess, even though our country remains the world's choice for other countries to put their money, in good times and bad; no one else has had the combination of transparency, opportunities, and freedom from burdensome bureacracy and political meddling prone to nearly all other options. But we must remember that politics does not stop at our own political border. And Europe, confident and dramatically more regulated than the US, has stumbled on their own just as badly. The issue is thus not if regulation exists, but rather if it is appropriate for the situation at hand.

For those that see the answer as more oversight and regulation, we should always ask what regulation specifically would have prevented this economic problem without creating even greater problems, and when, prior to this crisis, someone actually made a prolonged and focused effort to achieve that change. I told you so isn't a very valuable contribution if you did not, in fact, tell us so. As Megan McArdle has pointed out, financial regulation is usually better at preventing the last crisis than the next one. Despite efforts (themselves neither prolonged nor focused) by the current administration to increase regulation back in 2003, the ranking leader of the Financial Services committee maintained earlier in 2008 that there was no crisis. The record of candidates on speaking out for such reforms is well documented, yet unfortunately not well understood among likely voters (which is why they are able to make such erroneous claims). Others, instead, propose to recycle ideas like the Home Owners' Loan Corporation without thinking through what this would really mean in today's world. The contrast with the 1930's, when everyone had lots of equity in their homes, with today, when millions of people have none, is clearly significant.

As the systems dynamics factors of this 'crisis' accumulated over time, one of the greatest concerns about the current situation is that the Fed and Treasury have focused on liquidity traps, which occur when Treasury bill rates approach zero. When this occurs, monetary policy agents then become unable to stimulate the economy with their traditional tools (a condition which, if protracted, could then lead to bank runs). For example, there was a brief period in which Treasury bills traded for negative interest during the initial period of the crisis. At a recent Harvard panel discussion on the bailout, Ken Rogoff has disputed that there really is a liquidity crisis. He says such a thing can become a self-fulfilling prophecy, caused by the promise of a government bailout itself. The financial services industry does not want to pay the terms required to get money back in circulation (e.g., give up equity), simply because "Why do business with Warren Buffett, who will negotiate a tough deal, if you believe that the government will ride in soon with cheaper cash?" In the future, we thus must remember there were other credible options to the choices we have made, but the panic rush to judgement prevented their consideration.