Arnold Kling, asymmetric information, and the crisis

Arnold Kling from Econlog posts a passage from Michael Bordo approvingly. Specifically I enjoyed this part:

A key dynamic in the crisis stressed by Mishkin(1997) is information asymmetry, manifest in the spread between risky and safe securities, the consequences of which(adverse selection and moral hazard) are ignored in the boom and come into play with a vengeance in the bust.

So it appears they they both agree that asymmetric information is the key factor turning the current adjustment into a crisis (this is a belief that we share).

I would add one thing. Personally, I don’t just think it is “irrational exuberance” that leads to asymmetric information losing weight during a boom. I think that institutions form (reputations, organisations and the such) which appear to take care of the asymmetric information problem. However, when the downturn comes, and we discover that some of these institutions no longer exist/function we end up with a collapse.