Earlier this week I had coffee with a former colleague, now eminent outside the legal academy, who was in town for a few days. He's very much to the right of me politically, but someone I've always respected as intelligent, thoughtful, and intellectually honest. Not a law and economics person, by the way.
The financial crisis came up and, while it's not his area of expertise, I must admit to being startled by what I heard. First off, he noted that the whole thing resulted from a regulatory failure. I agreed, but then it turned out that what each of us meant was rather different. He believes the entire thing was caused by the Community Reinvestment Act (apparently burrowing underground since 1976 until it finally exploded to deadly effect), with an assist from Fannie and Freddie.
He in turn was startled by my suggestion that failures in corporate governance, particularly in the financial sector, reflecting managerial opportunism and lack of transparency, could reasonably be thought by anyone to have had anything to do with the crisis. The only problem he could see in the financial and general corporate sectors that markets weren't completely able to handle was the "too big to fail" problem of government rescue.
He also believes that it is logically impossible for Keynesian stimulus to have any effect whatsoever, since what you spend here doesn't get spent there, and that there is absolutely no need to worry about the banks. If they all fail and money can be made by lending, then of course businesses will spring up right away and start doing it.
I have to confess that this exchange diminished my enjoyment of the meeting, but it was also more broadly dismaying. Level one is realizing the degree to which even intelligent people on the right can be completely divorced from reality on these matters. They go to trusted information sources, which have been making absurd and easily falsifiable claims about the current situation and the underlying issues. Level two is realizing how everyone does this to a degree. Because we all get our information from sources we have pre-coded as trustworthy and simpatico, we all may have a difficult time seeing what's right in front of our eyes.
One more reason to despair about public policy, even leaving aside all of the incentive and interest group problems that even by themselves are so crippling.