Chairman Phil Angelides and the Democratic majority on the Financial Crisis Inquiry Commission have released their report, a textbook-worthy example of the “Evil Man School of Economics.” Something went wrong, and a villain must be identified. This is tediously familiar territory for those who have followed the political establishment’s years-long attempt to evade responsibility for the crisis of which it was a cause.
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“We conclude this crisis was avoidable,” they write. “The crisis was the result of human action and inaction, not of Mother Nature or computer models gone haywire.” That much is hardly objectionable. But which human actions? On that question, the commission’s report is both implausible and nakedly political: The Evil Men are greedy corporate executives and Wall Street moneymen, and the crisis might have been averted if only they had been endowed with sufficient moral fiber — or had an appropriately mindful policeman appointed over them, which is the real point of the Angelides report. Which is to say, the Democrats have produced an analysis that relies upon and reinforces the mythology of the Left, producing a document that may as well have been written by Rolling Stone’s Matt “Vampire Squid” Taibbi, minus the literary flair.
Yes, this crisis was avoidable. To avoid it, we would have had to do a number of things differently. The first is to alert the authorities, beginning in the 1930s, that federal policies designed to encourage homeownership — well-intentioned though they have been — would create, and today continue to sustain, a set of economic incentives driving vast amounts of capital from around the world into the U.S. residential real-estate market. From the Federal Housing Administration to Fannie Mae and Freddie Mac to the mortgage-interest deduction, U.S. government policies distorted the market, creating a massive misallocation of capital under the naïve theory that housing prices only move in one direction: up.
The second action would be to prevent the dot-com bubble of the 1990s, of which the housing-market meltdown was both an echo and a consequence. Like the real-estate bubble, the dot-com bubble was cheered on by the American government, the American consumer, and the American banker, because nearly everybody likes appreciating asset prices and the illusion of wealth that accompanies them. When the dot-com bubble burst, Washington responded the way Washington always responds: by slashing interest rates, hoping that a sluice of cheap money and easy credit sloshing through the economy would stimulate productive economic activity, or the illusion of productive economic activity, sufficient to disguise the damage done by the bubble. Having been burned by unprofitable start-ups at home and disappointing emerging-market investments abroad, a great many Americans decided to invest that easy money in houses. Washington was keeping interest rates down and encouraging the loosening of mortgage-lending standards; at the same time, Washington’s creatures, Fannie Mae and Freddie Mac, helped give the mortgage market enough liquidity to alarm Noah. They were helped mightily in that endeavor by the rise of massive savings in China and elsewhere in the developing world, all of which went looking for somewhere to invest: Where better than the American mortgage market, where a great many of the underlying loans were insured by the government or its proxies?
Third, we would need to convince a great many Americans not to take out mortgages they could not afford should their houses fail to appreciate, and convince a great many financial managers not to make bad investments large enough to bring down their firms.
Mr. Angelides, formerly the treasurer of California, should know something about man-made financial disasters. And the truth is that Goldman Sachs did not cause this crisis, and neither did Barney Frank. Bad investments, economics, and well-meaning government policies caused it. There were, and are, bad actors in this story. But the main problems have been the natural limitations on human knowledge, including the knowledge of government officials and the managers of large financial institutions.
The dot-com bubble actually destroyed more wealth than did the decline in housing prices; the housing meltdown became a crisis because the related securities losses were concentrated in a small number of firms, and because those firms were dramatically over-leveraged. If there is a public-policy proposal to be extracted from this mess, it is that in a world of “too big to fail” banks — and, like it or not, that is the world in which we live — large financial institutions should be subject to tighter leverage controls, with higher standards for capital reserves and liquidity. That dry, technical reform would solve most of the problems that we might hope to solve with new financial regulation, but it would not provide any emotional satisfaction to those who wish to use this crisis to rail against executive bonuses, which had almost nothing to do with the problem, or to those who wish to sermonize about the alleged moral failings of capitalism. Still less would it offer any political opportunity to former real-estate developer Phil Angelides and his Wall Street–backed Democratic colleagues, who wish to use the crisis as an opportunity to expand the size and scope of the managerial state that did so much to create it.
I think you might have let Barney Frank off too easily. With all the hatred constantly spewing from him it proves that either he is one of those "bad actors" or that he's stupid. Those are the only two choices.
"If there is a public-policy proposal to be extracted from this mess, it is that in a world of 'too big to fail' banks — and, like it or not, that is the world in which we live — large financial institutions should be subject to tighter leverage controls, with higher standards for capital reserves and liquidity."
The conservative economist Arnold Kling, working out of the conservative Mercatus Center of conservative George Mason University, specifically cites the capital problem as THE biggest problem, with no "if":
More regulation does not necessarily equal better or more effective regulation. When you hear arguments that derivatives reporting should have been more stringent for example, you are left to wonder how then a few people who actually took the time to read the disclosure documents realized the risks and shorted the securities.
Regulation (CRA) contributed to the problem. Regulatory push to make more loans to more under-qualified borrowers was more regulation which contributed to the problem.
Federal government set up the playing field with policies & rules. The participants big and small engaged in the game. Small ones lost small and no one blinked. Big ones lost big, so government took from the public to help the big guys.
The result is that the big guys keep on playing carelessly, knowing that government will not let them fail.
The public knows that they were played for suckers and that government looks out for the big guys because of irrational fear of economic turmoil. They should have been allowed to fail, big and small.
The housing market was killed by government intervention. Virtually no person who writes here will say that there should be no regulation. But it is clear that such regulation creates a pattern of incentives and disincentives that cause businesses and individuals inevitably adapt. The environment created by the regulatory climate in mortgages and investment created a deadly situation that caused both people and businesses to do things that would have been unthinkable prior to 1977.
The fact that we are now dealing, more or less, with a monumental problem created by the unintended interactions of those policy effects suggests that our ebullient central planners need a huge dose of humility and restraint.
No discussion of the Angelides financial crisis inquiry commission (FCIC) is complete without reference to Peter Wallison's dissent External Link
The FCIC is a sad joke for many reasons: (i) it fails to address the monumental role the government played in inflating the housing market, (ii) Dodd Frank was passed before it was produced, so the mission was clearly post facto rationalization, not honest analysis, (iii) per the Minneapolis fed, at the crisis time, 95% of US banks held reserves well in excess of statutory requirements and were well cushioned to withstand dislocation, (iv) many institutions had effectively quarantined the risk of real estate asset deflation, (v) the crisis was first and foremost an excuse for a narrow handful of politically-connected institutions (AIG, Goldman, John Paulson, and trading partners) to be made whole on their "too good to be true" arrangements to profit from the asset value decline.
The housing market was killed by government intervention. Virtually no person who writes here will say that there should be no regulation. But it is clear that such regulation creates a pattern of incentives and disincentives that cause businesses and individuals inevitably adapt. The environment created by the regulatory climate in mortgages and investment created a deadly situation that caused both people and businesses to do things that would have been unthinkable prior to 1977.
The fact that we are now dealing, more or less, with a monumental problem created by the unintended interactions of those policy effects suggests that our ebullient central planners need a huge dose of humility and restraint.
Yes, leverage controls are regulatory. However, even they would not be necessary if lending institutions AND the people that run them, are held accountable for their risky decisions. Right now, that's not the case, which is also regulatory.
The truth is, the Fed needs banks to leverage money. Our fiat system is built off of that.
I also think that Dodd and Frank are being left off to easily. Through their manipulations, they coopted the housing segment for their own political purposes. Both of them should be charged and jailed.
And, the Fed is not catching their fair share of blame. Their policies are as much to blame for the problems as anything. Their constant loose money policy is killing us. There's another bubble brewing out there now because of them. This all is going to happen again. It's only a question of when.
Look at any financial debacle and you'll find excess leverage at the root.
Hallen, in my opinion, is correct. Excessive leverage is bad enough in anyone's hands but it is unthinkable to combine high leverage and no accountability. The major banks were all over levered (many to an absurd degree). And the fallout for the executives who "oversaw" this debacle? Most walked away with millions and many are still raking in millions and still "managing" these banks. What lesson have they learned? Have their subordinates learned?
Its both the leverage and the accountability....."stupid".
Too big to fail is just plain stupid. Had we let those institutions fail the economy would have recovered by now. The capitalist system along with its reasonable regulations is really a system of creative destruction. GM would have been disbursed to other entrepreneurial buyers and would have quickly been satisfying demand. Instead we have the union owning the company and the feds directing uneconomical product development.
Paulson and Geitner only served their crony capitalists with TARP and the other bailouts. They should have all gone the way of Lehman Bros. Instead Goldman, Paulson's alma mater, was given uncommon access to TARP money and the banks just took their money and sat on it to pump up their balance sheets. Crony capitalism at its worst.
This editorial hesitates to draw the only possible conclusion from the (correct) premises it states.
Quoting:
Third, we would need to convince a great many Americans not to take out mortgages they could not afford should their houses fail to appreciate, and convince a great many financial managers not to make bad investments large enough to bring down their firms.
[End quote]
The conclusion is obvious when you consider the competitive market to provide mortgages to people who could not pay for them:
The financial managers intentionally made "bad investments large enough to bring down their firms" because their executive bonuses assured that they would prosper no matter what happened to their companies. The agent problem became so huge that the economy was in danger of collapse.
But the editorial asserts that "executive bonuses had almost nothing to do with the problem". In response, consider what bonuses caused: executives at firms writing mortgages lowered their standards to countenance many "ninja" loans (ninja = No Income, No Job, no Assets); executives at banks and other organizations accepted and bundled these loans, knowing they had to fail, but gamed the system so that the software appraising their value would reassure the rating agencies and regulators (not that the rating agencies needed more than an excuse to be fooled); these executives held on to some of the inevitably toxic assets and leveraged their companies to assure that corporate failure was inevitable when housing prices started to decline.
This scam took time to create disaster, and no one was going to take back the money obtained under false pretences. The executives couldn't lose. One of them defended himself by observing that if he hadn't destroyed his company for personal gain, his board would have been so offended that he would have been fired and a greedier replacement found.
The reform passed by Congress did little to prevent such a problem occurring again. Instead, Senator Dodd was quoted as hoping that the legislation had provided the tools to allow intelligent people to prevent a similar disaster. Obviously, it will happen.
I expect healthcare will prove the next bubble. 800,000 jobs gained during the recession, and fee-for-service costs will rise until they become unaffordable.
The issue for those who want to profit from the bubble is, how can healthcare be securitized? Maybe bundles of medical bills outstanding?
Nancy Pelosi and Harry Reid appointed Phil Angelides Chairman of the FCIC in July 2009. Angelides was Board Chairman of the Apollo Alliance and AA has exerted powerful influence in the Obama administration crafting large portions of the American Recovery and Reinvestment Act (the Stimulus Package). Among the "endorsers" of AA... ACORN, Working Families Party, Progressives States Network, and some 30 Labor Groups including SEIU, AFL-CIO, Teamsters, UAW, Mine and Steel Workers. A director of New York state's chapter of Apollo Alliance, Jeff Jones, was one of four key leaders of the Weather Underground in the 1970's along with Mark Rudd, Bill Ayers, and Bernardette Dohrn. And incidentally,
Van Jones was on the National Steering Committee of the Apollo Alliance. Why would Nancy Pelosi appoint such a partisan fiqure to such an important position?
Giving Barney Frank a pass on contributing to the financial meltdown mess is bad enough. Even worse is failing to mention or criticize the scams and excesses of Big Business and its allies in Big Government.
Why are conservatives so reluctant to call the business community, especially big corporations, to account? They are biggest abusers and traitors to a truly free enterprise system that they systematically corrupt and subvert.
