Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

Barry Ritholtz’s Ridiculous Time Lapse Rule for The Financial Crisis


Whenever someone points to causes of the financial crisis not officially approved by veteran blogger Barry Ritholtz, lightning and thunder issues forth from Ritholtz’s blog—The Big Picture—decrying the spread of disinformation and “cognitive dissonance.”

Ritholtz’s favorite tactic is to point out that X could not be a cause of the financial crisis because the existence of X predated the financial crisis. We like to think of this as Ritholtz’s Time-Lapse Rule of the crisis.

Barry Ritholtz

Ritholtz trotted out the Time Lapse Rule once again in response to my New York Times Op-Ed on Fannie Mae , Freddie Mac , and the Federal Housing Administration.

"Fannie was created in 1938, and Freddie was created in 1968," Ritholz writes. "Now explain to me why in 2008 — 70 and 40 years later respectively — they somehow caused the crash & crisis?"

Stated in this way, the Time Lapse Rule has the trappings of a sensible point. But those trappings vanish in the presence of thought. It only makes sense if you close your eyes to the profound changes that Fannie and Freddie underwent in the recent past—changes that led them to take on more risk and encourage riskier mortgage lending.

Importantly, even Ritholtz doesn’t really believe in the Time Lapse Theory. It’s easy to see this just by looking ath who Ritholtz does want to blame for the financial crisis. He’s helpfully provided a list of 25 culprits, so this isn’t a difficult assignment. What happens when we apply the Time Lapse Rule test to Ritholtz’s list?

The first name on Ritholtz’s list is former Federal Reserve Chairman Alan Greenspan. The second name is the Federal Reserve itself.

Greenspan was born in 1926 and the Federal Reserve was created in 1913. Both are even older than Fannie and Freddie. If a large lapse in time between creation and crisis disqualifies Fannie and Freddie as causes of the crisis, shouldn’t they also disqualify Greenspan and the Fed?

Ritholtz also blames Senator Phil Gramm, the ratings agencies, the SEC, and the five biggest Wall Street firms. But all of these are older than Freddie Mac and nearly all of them are older than Fannie Mae. If they can be causes of the financial crisis in Ritholtz’s view—surely the time lapse cannot rule out Fannie and Freddie.