Just got through Engineering the Financial Crisis by Jeffrey Friedman and Wladimir Kraus. It does the important work of questioning each of the standard explanations for why the crisis occurred (i.e., banker compensation, deregulation, irrational exuberance, etc.), and tries to show that most of the problems can be laid at the feet of the Basel rules regarding minimum capital requirements for banks. Specifically, it details how leverage levels amongst the biggest banks did not really change over the period in question (1999-2007), and in fact most of the investments by these institutions in MBS/ABS/etc. were not in the riskiest tranches with the highest yields (which you would expect if moral hazard was playing a major role). In fact, with the introduction of Basel I (and then the Recourse Rule), and the associated risk-weighting attached to different categories of loans and assets, you see the most obvious correlation with how bank behavior changed. By contrast, the book notes the several studies that have been done to establish a nexus between compensation and risky behavior, and the unconvincing results that came out of each.
The authors also point out how many economists tend to fall into the trap of "hindsight bias" when analyzing recent events. Some of the biggest names (Shiller, Stiglitz) did not demonstrate a full grasp of potential ramifications pre-implosion, but are quite comfortable making the case ex post that compensation structures or irrational behavior were the culprits. Yet, if the information was so clear and the warning signs so obvious, there is no reason to think that whatever nefarious behavior existed could not have been put in check early on by omniscient regulators. As, the belief in the infallibility of this group in the aftermath to determine and mitigate future risks is the implication in striving to establish more rules and restrictions.
While I wish a little more attention had been paid to the role of interest rates that were kept too low for too long, it was still a good read and offers an interesting counterpoint to the usual soundbites.
