Context: The financial crisis inquiry commission (FCIC) was formed in 2009 and issued its
final report a couple of days ago. The FCIC analyzed the causes of the financial and economic crisis of 2008. Democrats Reid and Pelosi appointed only
Democratic commissioners and Republicans McConnell and Boehner appointed only Republicans. No surprise there.
I see it my way, you see it yours
Also not surprisingly, the conclusions by the 6 Democrats and 4 Republicans showed splits along party lines: The Democrats all signed the majority report conclusions while the Republicans split into two dissents. Why might that be? Probably because reality the Democratic commissioners saw through the lens of their ideology differed compared to how reality looked through the lens of Republican ideology.
But neither of you really see it
In all likelihood, reality doesn't fit well with either ideologically based world view. No one can know what the FCIC would have concluded if commissioners were appointed on the basis of merit and without regard to their politics. Pragmatic independents with no political agenda would probably have come to differing conclusions than either the Democrats or Republicans. Because politics dictated the selection of the commissioners, there were splits. To a large extent that's a case of political ideology trumping reality. Again, no surprise.
Majority (Democratic) conclusions
The FCIC report came to some conclusions about how we got into the crisis, including the following main conclusion at page 17:
"We conclude this financial crisis was avoidable. The crisis was the result of human action and inaction, not of Mother Nature or computer models gone haywire. The captains of finance and the public stewards of our financial system ignored warnings and failed to question, understand, and manage evolving risks within a system essential to the well-being of the American public. Theirs was a big miss, not a stumble. While the business cycle cannot be repealed, a crisis of this magnitude need not have occurred."
Minority (Republican) conclusions
The first dissent: Three of the four Republicans disagreed with the Democratic assertion that the crisis was avoidable. They concluded this in their dissent (at page 416):
"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."
In their dissent, these three commissioners said this (at pages 414 and 416):
"When everything is important, nothing is. . . . . A credit bubble appeared in both the United States and Europe. This tells us that our primary explanation for the credit bubble should focus on factors common to both regions. . . . . . These facts tell us that . . . . the credit bubble is likely an essential cause of the U.S. housing bubble, and that U.S. housing policy is by itself an insufficient explanation of the crisis."
My confusion
This dissent was confusing. It focused on Europe and argued that similar problems there, e.g., a housing bubble, under differing regulatory structures meant that the source of the 2008 crisis was grounded in factors present in both the U.S. and Europe. These three argued the 2008 economic failure was therefore not just due to insufficient regulation, because regulation in Europe differed from that in the U.S. These commissioners focused on a credit bubble in Europe and concluded that a credit bubble in the U.S., loans too easy to get, probably was an "essential cause" of the housing market crash.
That is confusing (to me at least) because, if it were true, then the obvious way to deal with that and prevent the problem in the first place would have been to clamp down on "excess" or "risky" lending through our regulatory agencies. In my mind, that points to regulatory failure. The following dissent sees this aspect of this problem the about same way I do.
The second dissent: One commissioner, Peter J. Wallison of the American Enterprise Institute** concludes this in the other Republican dissent (at page 444):
"I believe that the sine qua non (essential condition or prerequisite) of the financial crisis was U.S. government housing policy, which led to the creation of 27 million subprime and other risky loans—half of all mortgages in the United States—which were ready to default as soon as the massive 1997-2007 housing bubble began to deflate. If the U.S. government had not chosen this policy path—fostering the growth of a bubble of unprecedented size and an equally unprecedented number of weak and high risk residential mortgages—the great financial crisis of 2008 would never have occurred."
Who done it and what did they leave us with?
So, what really led to the 2008 financial crisis and ensuing recession? Its hard to know. What I conclude is that everyone involved, government regulators, congress, the president, think tanks and academics all failed for the most part.
It is harder to assess what "blame" private sector players should get. To me, it looked like when they acted legally, they were just capitalists trying to make as much money as possible, as fast as possible. To a large extent, that is what capitalism is all about. Its a different story for people who broke laws in the feeding frenzy before the collapse. Regardless of who is at fault, we are still paying the price for their failures. To keep things in focus, this is what they left us with:
- high unemployment
- massive federal spending and debt
- a continuing awful housing market
- loss of trillions of dollars in the stock market and peoples' 401k plans
- excessive loss of home values
- taxpayer bailouts
- lots of bank failures (sour commercial loans)
- responsible people (not speculators and not the clueless or the reckless) losing their jobs, then losing their homes for failure to pay mortgages and then being unable to sell at even a break even point
- recent bipartisan crisis-related legislation (extending Bush tax cuts, unemployment benefits, etc), possibly imperiling America's credit rating with potentially catastrophic consequences (see comments about this at Rise of the Center)
Looking through the report, you can see the ideology of both Democrats and Republicans behind and shaping their analysis and opinions. The question is whether either ideology is mostly correct, partly correct or mostly wrong. One could argue that one of the three opinions or conclusions has to be closer to reality than the other two. However, one could also argue that an analysis unpolluted by ideology might lead to conclusions that are equally far away from all three opinions.
An unnecessary partisan move
One annoyance with the the partisanship of the commission was the Democrats voting to limit dissents to 9 pages (another source of confusion: the first dissent is at pages 413-437 - that's more than 9 pages). The three dissenters pointed this out at page 413. This is annoying because (i) the Republicans used it as an excuse for not fully explaining themselves and (ii) it said to me that the Democrats wanted to shut the Republicans up in case they actually had better explanations and analysis.
Despite the page limitation on dissents, whatever it was, I believe that the Republicans could fully explain themselves if they had wanted to. If they had more to say all they had to do was to publish their full dissents and analysis elsewhere online. It is easy. Is is a simple posting of a file on the internet, like
the FCIC report itself is online and easily available. Instead, Republicans used this as an excuse to avoid giving the public a full explanation. A pox on the Democrats for that unnecessary and purely partisan move to limit dissent. It allowed the Republicans to weasel out. A pox on them for weaseling out. Its just politics as usual.
Thunder from the pundits
According to some commentators (on NPR and POTUS satellite radio) familiar with the FCIC commission and the final report, the Democratic conclusion that the crisis was unavoidable didn't sit well with Republican ideology. They believe that is what provoked Republican dissents. After looking through the FCIC report, that assessment seems to be right.
So, what caused the financial crisis of 2008? It looks to me like another case of bipartisan failure grounded in a view of reality distorted by failed political ideology. Given the tone of rhetoric coming from the two parties, the financial crisis and other failures of recent decades (Vietnam, our dependence on our enemies for oil, etc), nothing is likely to change. Given
recent history and our prospects for the future, Democrats and Republicans govern without my consent. I hereby respectfully submit my own dissent.
---------------------------------
** Although it calls it
calls itself nonpartisan, the
American Enterprise Institute is a think tank that is about as hard core pro-business, anti-government, anti-regulation and pro-Republican as you can get. It is probably fair to characterize
Mr. Wallison as a hard core Republican ideologue and partisan second to none. It is probably also fair to believe that if someone had come to Mr. Wallison a few years before the 2008 crash suggesting that regulators needed to clamp down on easy money in housing, he probably would have blown them out of the room with a rhetorical bazooka.
Why? Because decreasing regulation is what anti-regulation, anti-government ideologues believe in. However, since things did blow up, now is the time for anti-government philosophers like Mr. Wallison to blast government for failing to do its job. He criticizes government policy for failing, even though Mr. Wallison himself would likely have implemented a similar hands-off policy if he was in charge himself.
Jinxed?
In his dissent Mr. Wallison also said this (page 448): "But the Commission’s investigation was not structured or carried out in a way that could ever have garnered my support or, I believe, the support of the other Republican members. One glaring example will illustrate the Commission’s lack of objectivity. . . . " Given that comment, it is no wonder that there was no bipartisan consensus in the FCIC report. It is clear that the two sides never could agree right from the get go.
Is there any value at all?
One can reasonably ask, is there anything of real value in the FCIC report? Yes, there is. The report is just one more concrete example showing how far apart the two parties are. They are so far apart in how they see the world that they cannot and will not work together efficiently. The report shows the depth and intensity of our political two-party dysfunction. In my opinion, that dysfunction correlates well with the depth and intensity of the two differing ideologies. In that regard, the FCIC report is a valuable public asset.
In terms of providing guidance for policymakers, the FCIC report may be of little or no value. That may be the case because, as Wallison points out at page 443: "Without waiting for the Commission’s insights into the causes of the financial crisis, Congress passed and the President signed the Dodd-Frank Act (DFA), far reaching and highly consequential regulatory legislation. Congress and the President acted without seeking to understand the true causes of the wrenching events of 2008, perhaps following the precept of the President’s chief of staff —“Never let a good crisis go to waste.” "
