The final report of the Financial Crisis Inquiry Commission is meant to be the definitive account of the economic crisis that erupted in 2008. Like the 9/11 Commission Report, it seeks to provide a complete account of the circumstances surrounding a cataclysmic event, in this case the worst recession since the Great Depression. Unfortunately, political disagreements among the commission members combined with the complexity of the narrative threaten to consign the report to obscurity.
If that happens, a crucial opportunity will be missed. Even with the adoption of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the regulatory system in place may not be strong enough to prevent another crisis. As the commission members observe, “If we do not learn from history, we are unlikely to fully recover from it.”
While the 9/11 Report was hailed by members of both parties, the Finance Commission faced significant political obstacles from the outset. The causes of the crisis are still much debated on Capitol Hill, and government’s response to the crisis, the Troubled Asset Relief Program, or TARP, is politically poisonous. It is not surprising that none of the Republicans on the commission chose to endorse its findings, deciding instead to issue two lengthy dissents. For one thing, the report offers a stinging indictment of financial deregulation, an article of faith for Republicans—and some Democrats—for the last 30 years.
Already critics are dismissing the commission’s report as a politicized document. In fact, it is grounded in months of research and hundreds of interviews, some facilitated by subpoenas. If not a definitive account of the crisis, it is the most thorough so far and merits serious study. A few of the report’s themes deserve emphasis.
Risky Business. The mortgage industry has been widely pilloried for its unethical lending practices prior to the crisis, and the commission’s report adds depth and detail to that judgment. Yet it is also striking how many American homeowners took advantage of these lax practices, signing on for adjustable-rate mortgages or trying to make a quick profit by “flipping” a second home. Overall, mortgage indebtedness in the United States doubled from 2001 to 2007, from $5.3 trillion to $10.5 trillion. In the wake of the housing market collapse, few parties emerged unscathed.
Irrational Exuberance. Again and again the report cites individuals and institutions who warned of the coming crisis. Beginning in 1999, a nonprofit housing group in California alerted Chairman Alan Greenspan of the Federal Reserve to predatory lending practices. Why were such warnings ignored? With markets surging and retirement and investment accounts following suit, few seemed willing to play spoiler. As one former government official said of the mortgage market: “Everybody was making a great deal of money...and there wasn’t a great deal of oversight going on.”
Markets Unbound. “The financial system we examined bears little resemblance to that of our parents’ generation,” the report’s authors write. And yet the regulatory regime in place during the crisis was created to deal with financial problems that arose generations ago. In some instances, those reforms had been severely weakened. In the case of the Glass-Steagall Act, which sought to regulate the activities of the banking industry, the reform was repealed altogether. The triumph of the gospel of deregulation led to risky decisions that valued short-term profits over long-term investment.
Watching the Watchdogs. Public institutions with the power to rein in questionable practices failed to act, most notably the Federal Reserve. Meanwhile, Moody’s and other ratings agencies charged with assessing the strength of financial instruments repeatedly awarded misleading ratings. In case after case, individuals failed in their professional and ethical responsibilities.
With the Dow Jones Industrial Average hitting 12,000 in January for the first time since 2008, it is tempting to let the financial crisis fade into history. Yet as Wall Street surges, the economy still sputters, in very large part because of the events of two years ago. A final reckoning is necessary both to determine what went wrong and to ensure the system does not fail again. The rise and fall of the housing market is an example of corporate malfeasance not unlike the rush to war in Iraq in 2003, with both individuals and institutions playing a part. Some national soul-searching seems in order.
That examination could well begin with the 633-page report from the Financial Crisis Commission. Though short on analysis and weakened by Republican dissenters, it recognizes the crisis for the fundamental failure of responsibility it was. And for the average reader, the report offers a simple judgment amid an ocean of detail, one that could serve to temper the next wave of market madness: “We conclude this financial crisis was avoidable.”
Anyone with a sense of poetic justice would have seen the CEO of Merrill playing golf at Wacabuc every day, as a latter day Nero fiddling while Rome burned. He even had the head of mortgages dispatched like a centurion who had turned to Christianity. Is this anecdote in the Angelides report?
Right now the nation is running on the 2010 budget for the second year with few ajustments. During FY 2011 the budget deficit will increase by one and a half trillion dollars - an all time record for a single year and will surge the national debt to 15 trillion dollars, a recklessly high and unsustainable amount. And by the way all the automatic spending has not improved the U.S. economy for the last two years.
So given that Democrats in control of Congresscould not even produce a federal budget - something that other Congresses have been able to do for hundreds of years - why should one expect an objective "definitve report" on the 2008 economic collapse from the same Congress? Failure to produce a federal budget is a failure to govern as required by the U.S. Constitution. Congress failed to regulate and govern itself.
The definiteve analysis of the 2008 economic crisis will come but not from Democratic controlled congress that failed at the most basic level to be able to control the budgetary processes of the United States and have recklessly allowed the finances of the United States to explode into a 14 trillion dollar national debt.
There were two factors that were the primary cause of our housing disaster, the main single element of the problem common to both, bad government decisions: bad regulation and bad deregulation. Since democrats had the majority in this report and are in favor of decisions residing not in the hands of the private citizen but in the hands of the government, they emphasized the deregulation and deemphasized the regulation; republicans, in favor of decisions residing in the hands of the private citizen, would have emphasized the regulations. Had republicans had the majority of the committee membership, you would merely reverse the analysis and the dissent portions.
Some of the longstanding and recent decisions that artificially inflated the value of housing and contributed to the default epidemic are: the full deductibility of mortage interest for housing payments; the creation of Fannie and Freddie and putting the guarantee of the federal government ultimately behind the debt on mortgages, thereby taking a huge segment of risk out of mortgage lending and defeating the natural corrective action of the free market by unnaturally reducing risk; orders to Fannie and Freddie from Barney Frank and cohorts to make unsound loans, including no down payment loans, negative amortization loans, even counting unemployment payments as borrower's income for the loan, and the toleration of Liar Loans; and by creating pressure on Washington Mutual and other S&Ls to offset the huge advantage in mortgage insurance cost that Fannie and Freddie had because of their implicit federal guarantees by taking riskier loans or face the steady loss of their business. The precedent for a huge violation of the free market principle was the Long Term Capital fiasco. This early example of excessive use of leverage for unsound speculation would have caused a severe loss for Lehman Brothers, Drexel Burnham, and the most speculative of the investment banks. It would have resulted in severe losses for these investment banks, likely forced sales and the CEO's jobs which would have provided the natural deterrence of punishment for excessive risk taking. But it would not have created such a crisis as we have seen now. Instead, the government cobbled together a bailout, and Lehman and Drexel and those like them could continue in their profligate, and dangerous, ways. Now Merrill Lynch and others knew if they speculated and lost, to a great extent the government would bail them out. The free market penalty for excessive risk was reduced by bad government decisions, setting up the stage for later and greater economic disruption.
There are other examples, but these will suffice. Surely the Clinton administration's revocation of the Glass Steagel Act contributed greatly to the problem, but it really was government distortion of the free market risk side of the risk reward equation that did the most damage to our economy.
the big financial crisis in THE USA has ruined many of our village folk,who own neither a home nor an asset;when anyone falls sick,needs medication our women come to our rescue by mortgaging the small piece of gold which the poor husband ties around her neck during the wedding mass;most are unable to redeem it,for they are not able to pay even the interest;the time comes when the money lender sells the gold piece to reclaim his capital;the next time anyone falls sick the family has nothing to pay for medication,of even children.
i still believe that the american people as a people whether DEMS OR REPUBS mean well;but the steps you are taking to handle this financial crisis will reduce our village folk to beggars. when i know how this financial crisis has hit the economy i have no heart to request for help,even ten dolours,on behalf of our poor.ideology,if not personal finandcial security trumps."WHATEVER YOU DO TO THE LEAST OF MY SISTERS AND BROTHERS.......Please pay attention to the cry of the poor,even if the REPORT does not help you
So encouraging to see the insightful analysis of Jamie and Tom Maher who identify (gasp!) government itself and its irresponsible do-gooder policies as a key to the mortgage mess. And the brilliance of Walter Mattingly . . . pinpointing the role of Democrat regulation and fearlessly indentifying the single individual most culpable for the whole mess, fingering directly that transcendent agent of destruction that so many fear to name—that person? why Congressman Mr. Barney Frank, as so many know but are petrified to say.
Those working on this report wanted to wield it as a political tool.
In the inflation of the housing bubble, it's not clear that anyone had the practical ability to stop it. Could a lone bank manager really stand up and say "I'm going to pass on the massive gains coming from this" ? Not without losing his job. Could a mortgage broker have said to his boss "I know we've made money on every one fo these transactions so far, but I think we should stop" ? Probably not. And who in government could have weathered the political storm had they stood up and said that the gravy train that the American People so loved needed to stop and that it was creating a house of cards?
Warnings came, but they came too late... a bubble had already formed and no one wanted to be responsible for popping the bubble and no one wanted to lose out on the big gains they could get while the bubble grew.
In some sense, everyone's responsible, but in another, doesn't that sort of mitigate the blame anyone can receive?
I'm not sure I'm convinced by the conclusion that it was avoidable. Perhaps systemic changes could make it less likely in the future, but simply creating a new regulatory body or slapping on a few new laws won't do it. If something could be done to fundamentally change things so that knowledgeable people have a clear interest in stopping the creation of a bubble, perhaps we can prevent such things in the future... but I'm not sure what those changes would be, and it does not seem like anyone in government is interested in finding out.
Government's reckless policy on housing and financing of a runaway housing market bubble is the root cause of the financial crisis. Unbalanced government policy put at risk the entire U.S. economy and fiancial system by grossly not enforcing proper mortgage credit standards. Instead the sole goal was to make mortgage money by the trillions of dollars available to eveyone to foster home ownership in disregard of minimal credit standards. The housing market even today is in very depressed condition due to government policy to allow a massive inflation in housing prices and a massive exposure to widespread mortgage defaults.
Freddie Mae and Fannie Mae are the primary U.S. mortgage lending institutions empowered with full government support and financing. These two quasi-government agencies allowed the reckless no-standards mortgage lending to take across the country with the blessing of Congress thhat oversee these institutions. The report fails to hold Freddie Mae or Fannie Mae accoutable for their disasterous lending practices that cause a housing bubble and hosuing collapse. But Congress allowed these lenders under Congress' control to distroy the housing market and thereby impact the rest of the U.S. economy and fiancial systems.
Every other financial collapse was seconday and caused by the primary collapse of the U.S. housing market. The Congress under the Control of Democrats since 2006 failed in its oversight of runaway goverenment agency Freddie Mae and Fannie Mae. So of course the "definitve report" by a Democratic controlled 111th Congress will not mention its own role in the root cause of the financial crisis.