In order to understand what caused the Financial Crisis, we need first to understand what it means to cause something.
Classically, causation can be classified four ways. We looked at material and efficient causes yesterday. Today we will examine formal and final causes. The formal cause of a table is the plan for a table–a horizontal plane supported by several legs. Think of it as the blueprint, or ideal structure. The formal cause of a chemical reaction would be periodic table and electro-chemical potential of various molecules.
The final cause is the purpose it serves. The final cause of a table is to lift stuff up so someone can get at it. The final cause of a car is transportation. It’s what we
So when we ask what caused the Financial Crisis, we should look at it classically, using the four causes. The efficient cause of the crisis was the subprime mortgage market; the material cause was monetary and financial flows; the formal cause was the structure of the financial system; and the final cause was to correct the imbalances and distortions that had developed in the economy.
We need to look at the crisis as fully as possible in order to understand it. Because if we don’t understand history we’ll just go through it again. We sure don’t need that.
Douglas R. Tengdin, CFA
Chief Investment Officer