Anatomy of financial crisis begins with skewed incentives

One hundred years from now, the publication of "The Panic of 2008" will provide an opportunity to reconstruct the events of today and explain how rising default rates on subprime loans in the US ultimately morphed into a global market meltdown and recession.

The author will offer a myriad of explanations for the crisis: easy money; flawed models; a lack of regulation or regulators willing to perform their designated function; more risk-taking on the part of housing finance agencies Fannie Mae and Freddie Mac, which bought and guaranteed lower-quality mortgages in order to stay in the game; conflict of interest on the part of credit rating companies; a misplaced belief that housing prices never fall on a nationwide basis; lax lending standards; too much leverage on the part of financial institutions; too little oversight of those same banks; a lack of transparency on securitized loans ... the list goes on.

There is, however, something basic underlying all the excesses. And that's the issue of misplaced incentives.