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Post Mortems on the Financial Crisis



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USA Today writes:

A congressionally appointed panel reported Thursday that the financial crisis that set off the Great Recession was avoidable, casting a wide net of blame over regulators and financial giants alike.

The story explains the conclusions in the final report of six members of the ten-member Financial Crisis Inquiry Commission created by the last Congress to investigate the causes of the financial crisis. The report’s main narrative is about an all-powerful financial industry and its influence in Washington. As it is, I wouldn’t be surprised if it didn’t become the basis for yet another Hollywood movie where slick and greedy bankers intentionally take down the country by taking advantage of poor homeowners and mortgage investors in front of paralyzed lawmakers.

One possible takeaway from the report, USA Today, writes:

Yet, Ed Mierzwinski of U.S. PIRG, a consumer group, says the report vindicates the financial-regulatory reforms passed by Congress last year. Wall Street firms are trying to delay or weaken some of the rules, saying it will harm U.S. competitiveness. “The main takeaway is, don’t let Wall Street roll back Wall Street reform,” he said. It “should be implemented as quickly and strongly as possible.”

Thankfully, USA Today does a good job at reporting on two major dissents. One comes from Vice Chairman Bill Thomas, Doug Holtz-Eakin, and Keith Hennessey. Their dissent tells a story that doesn’t necessary point the finger at one particular group but emphasizes both global economic forces and failures in U.S. policy and supervision. They wrote a piece in the Wall Street Journal that is worth reading here. More on their dissent here.

I really like their analysis; it tells a compelling story about how not one, but ten factors put together caused the financial crisis. It is a story about the world we live in and its complexity. It is a story about isolated fires that end up igniting a dramatic and uncontrollable fire. USA Today sums it up nicely:

That group of dissenters, which includes Keith Hennessey and Douglas Holtz-Eakin, two senior economic advisers to former president George W. Bush, places most of the blame on a global credit crisis caused in large part from a glut of savings from China and other countries that found their way to the U.S., resulting in record low interest rates. Those low borrowing costs helped inflate real estate bubbles in the U.S. and Europe. Singling out lax regulations in U.S. markets doesn’t tell the whole story, they argue, since Europe suffered similar economic problems despite more stringent regulations than here in the U.S.

“By focusing too narrowly on U.S. regulatory policy and supervision, ignoring international parallels, emphasizing only arguments for greater regulation, failing to prioritize the causes, and failing to distinguish sufficiently between causes and effects, the majority’s report is unbalanced and leads to incorrect conclusions about what caused the crisis,” the three dissenters concluded in their report.

The complexity they underline is key to understanding the causes and consequences of policies in our lives.

Finally, there is the dissent by American Enterprise Institute’s Peter Wallison, who argues that the primary cause of the financial crisis was government intervention in the housing market, mainly through Fannie Mae and Freddie Mac. In this dissent, you understand how government intervention inflated a housing bubble that triggered the crisis.

He argues that the government policy to increase homeownership in the U.S. resulted in less stringent mortgage underwriting standards and some 27 million risky subprime loans that set the housing market up for a fall once the real estate bubble began to deflate. Had the government not embarked on this policy, “the great financial crisis of 2008 would not have occurred,” Wallison argued in his written dissent.

Read more about the dissents. It is worth your time.



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