While Texas losses were relatively moderate during the second half of 2008, rising unemployment and a weakening housing market proved Texas was not immune to the financial crisi¡s.

President and CEO of the Federal Reserve Bank of Dallas Richard Fisher connected the dots for his audiences as he spoke and wrote about the financial classes in 2008.

Some Causes of the Financial Crisis:

Speculation on Housing: Like previous bubbles, the roots of the current crisis originated in the power of price escalation. Many U.S. coastal areas were beginning to see 20 to 30 percent year-over-year increases in home prices -- some going as high as 30-40 percent. Subprime mortgage borrowing or lending to high-risk borrowers occurred with lenders who were eager to lend to a "sure thing."

To a great extent, the bubble in housing was a classic case of the bigger-fool theory and efficient-market theory run amok.

Market Inefficiency: Our own vivid experience in Texas in the 1980s teaches us that in booms and bubbles, prices overshoot and during busts, they over-correct.

The markets in commodities, like those of stocks and bonds, are manic-depressive mechanisms and overshoot on the upside as well as the downside. One could deduce from recent price reversals in oil and food prices that they overshot on the upside and there price run-up was a one-off development. If you subscribe to this argument, you envision a process not unlike that of a python digesting dinner. It visibly moves through the system, creating some moments of discomfort in this case, a temporary inflationary bulge, but is processed in reasonable time and done with.

Rapid Innovation: Too Far Too Fast: We saw a wave of innovative mortgage products during the housing boom. Indeed, there would have been no other way for many borrowers to have found financing without these new mortgage products.

These innovations in financing took two forms. First, credit-scoring models enabled lenders to better sort and price mortgages made to nonprime borrowers. The second set of innovations allowed these loans to be funded and sold to a new class of investors.

While traditional mortgages had long been securitized and sold through government-sponsored enterprises (Fannie Mae and Freddie Mac), the securitization market ushered in a new team of players from the private sector. This new team would hold nonprime mortgages that did not meet Fannie Mae/Freddie Mac standards and that banks would generally not hold in portfolio.

New and complex securities sliced and diced risk into different tranches. It was though the collateralized debt obligations and collateralized debt obligations and collateralized loan obligations could be hedged with credit default swaps to make them appear to be almost risk free.

Using computers to assess probabilities at warp speed, this growing menu of risk instruments began to expand even more dramatically. Financial intermediaries (like Goldman Sachs and many others) began offering exotic products to satisfy almost any (greedy) risk-taker's needs anywhere in the world at any time.

These appetites for risk became excessive during the boom years leading up to 2008. Innovations, securitization and the originate-to-distribute model of banking were not new, but they took on some new and uncharged dimensions.

Over-reliance on Models: Excesses in subprime lending in the U.S. were fed by an excessive faith in technically-sophisticated approaches to risk management. Another feeder was a misguided belief that mathematical models could accurately price securitized assets, including securities based on mortgages. These valuation methods were so technical and mathematically sophisticated, their utter complexity lulled many into a false sense of security.

New and sophisticated statistical models, made possible -- in part by advances in computer technology, assured us that all the new risk was being properly and accurately measured. Ratings agencies further comforted us by giving many of the new securities their seal of approval and often their highest triple-A seal.

The most striking and truly new part of the recent financial cycle was the mistake of replacing sound judgment with the mathematization of risk. An immense array of statistical gadgets wielded by a new generation of quantitative minds managed to squelch the wisdom of long-time bankers and seasoned financiers. The lesson -- statistical models are not infallible.

Market Inconnectedness: At the heart of this specific downturn is the interconnected nature of financial market participants. Unfortunately, while everyone knows this interconnectedness is important, it is difficult to tell exactly how and to what extent things are woven together, sort of like the "butterfly effect."  A butterfly's wings disturb the air around it, setting off a chain of events that ends with a major storm in some remote part of the world. A small catalyst results in large, and sometimes catastrophic, consequences.

The crisis spreading through the global financial system can be thought of as a butterfly effect. Take credit default swaps, for example. These instruments and the institutions they connect are complex. In principal, these swaps provide a fairly simple service. Properly used, they are a form of insurance against the risk of default of an underlying asset, and while that might sound appealing, the value of the insurance is only as good as the person providing the guaranteed.

When that individual's viability is called into question -- when heightened uncertainty enters the mix -- the whole network will suffer the consequences.

Monetary Policy: The hunger for new risk products was stimulated by a lengthy period of abnormally low interest rates and the normal human instinct to look for ever-higher yields when the returns on the usual financial instruments like U.S. Treasuries, bank CDs or municipal bonds become ho-hum.

In spite of all the advances in economic theory and risk management techniques, when the economy and financial markets get too headstrong and frisky, they become hard to rein in.

Economists like to say that one of the purposes of a central bank like the Federal Reserve is to tame the animal spirits of the economy, employing monetary policy to keep the nation on the path to sustainable, non-inflationary growth. William McChesney, one of the greatest of the Federal Reserve Chairman, used to say that the job of the Fed is to take away the punch bowl just as the party gets going.

Today's economic crisis is the consequence of the failure to take away the punch bowl and allow the exuberant animal spirits of out economy to get out of hand.

Insufficient Constraints: There are plenty of armchair quarterbacks who now say they saw it -- the current financial crisis -- coming. Indeed, we must acknowledge that many in the financial community, including the Federal Reserve, failed to either detect or act upon the telltale signs of financial system excess.

• Cutting back on expenses may be a good “first whack” at economic pressures, but in truth, being well-positioned and showing strength in face of the current economy are also necessary.
• Know your competition. Maximize your strengths and know your competition’s weaknesses. The more you know, the better position you have to capitalize on your position.
• Be brutally honest. Take a look at how you do things and determine if this is the best you can do – from the standpoint of price, how well each element aligns with your reputation and from the client family’s point of view. Is presenting a family bible after each service serving your purpose and your tradition of service…or is simply a freebee that, in truth, doesn’t mean too much to the family?
• Do you use customer surveys to their full advantage? How often are customer surveys used? Once you’ve received survey results, do you make changes…or continue with the status quo?
• If your relationships with vendors, other firms and your families need improvement, don’t wait. Now more than ever before, your business and personal relationships will determine the future of your firm.
• Leave no stone unturned. In an economic downturn, your firm should be streamlining processes, offering training to employees who aren’t totally up to speed and making changes whenever and wherever they may be needed. Just because you’ve been doing things the same way for 10 years is no sign these same processes and procedures will carry you through every challenge.
• Don’t be afraid to ask – or answer – the tough questions. Be open and honest. Have brain-storming sessions where new ideas and thoughts can be considered and then employed or discarded.
• Stagnation is not an option. Keep moving forward, maintain an open mind to new ideas and listen to your clients – they will tell you their needs and expectations, often before you ask.