FCIC final report: 'Financial crisis was avoidable'

The Financial Crisis Inquiry Commission has released its final report, which looks to “determine what happened and how it happened so that we could understand why it happened.” The full document — including the dissents from four of the Republicans on the panel — can be downloaded here. The transcripts of the hearings the committee conducted can be found here. If the thousands of pages in those two links seem like a bit much to you, the FCIC’s conclusions are here (pdf). This, I think, is the key takeaway:

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 While the business cycle cannot be repealed, a crisis of this magnitude need not have occurred. To paraphrase Shakespeare, the fault lies not in the stars, but in us.

Despite the expressed view of many on Wall Street and in Washington that the crisis could not have been foreseen or avoided, there were warning signs. The tragedy was that they were ignored or discounted. There was an explosion in risky subprime lending and securitization, an unsustainable rise in housing prices, widespread reports of egregious and predatory lending practices, dramatic increases in household mortgage debt, and exponential growth in financial firms’ trading activities, unregulated derivatives, and short-term ”œrepo” lending markets, among many other red flags. Yet there was pervasive permissiveness; little meaningful action was taken to quell the threats in a timely manner.

The prime example is the Federal Reserve’s pivotal failure to stem the low of toxic mortgages, which it could have done by setting prudent mortgage-lending standards. The Federal Reserve was the one entity empowered to do so and it did not. The record of our examination is replete with evidence of other failures: Financial institutions made, bought, and sold mortgage securities they never examined, did not care to examine, or knew to be defective; firms depended on tens of billions of dollars of borrowing that had to be renewed each and every night, secured by subprime mortgage securities; and major firms and investors blindly relied on credit rating agencies as their arbiters of risk. What else could one expect on a highway where there were neither speed limits nor neatly painted lines?

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quiet Bill

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  • Capitalism does not clean its own house.

    The idea pushed by Bernanke, Greenspan, and Summers that fraud on Wall Street does not have to be intervened upon because the markets take care of their own has now been showed to be 100% wrong, and is never believed even by those who say they believe in it, for they are motivated by greed, and do not have a sense of right or wrong.

    Their inability to take responsibility for the pain and suffering they have inflicted on millions of people is, in my view, a form of criminal insanity.

    We should be taking a cue from the Egyptians right about now, and occupying the offices of the Federal Reserve and Goldman Sachs with a massive sit-in.

    If we did such a thing, we’d quickly find out whose side Obama is on, and I’d gamble my life savings to wager that it isn’t ours.

    Wake up and smell the coffee, people.

  • Find out just what any people will quietly submit to and you have found out the exact measure of injustice and wrong which will be imposed upon them,and these will continue till they are resisted with either words or blows,or with both~FDouglas

  • It is taking time to plow through 662 pages, and that’s just the official report. I don’t know how long it will take to sift through the documents that are also available online from the Commission. I may be able to get something up later today.

    Let’s just say that nothing I’ve read so far gives us an understanding of what really went wrong, but I suspect yogi-one has put his or her finger on a fundamental point. The US has never come to grips with Ayn Rand, the Objectivism philosophy, and its core principle that greed is good and the rights of the individual transcend virtually all obligations the individual may have to society. This philosophy, while not a direct contributor to something as remote as the housing collapse or the credit crisis, is part of a broad trend on the political right to discredit the government and its potential usefulness to society, other than as a tool for the advancement of the narrow individual interests of people of wealth and privilege.

    Meanwhile, it is not easy to keep reading through this report while also paying attention to events in Egypt, which are probably already far-reaching in their implications even though Mubarak is still in power. What is shocking about Egypt is the near-overnight collapse of political power by the ruling elite: the police are no longer willing to enforce the dictates of the regime, and the military is standing aside. The consequence is a breakdown of social order on a remarkably rapid pace, with Egyptians seemingly on a dangerous road to chaos until they are ready for the military to step in and restore order, with Mubarak obviously overthrown. How the military, at that point, promises and delivers on a new program that actually deals with the problems of unemployment and social constriction, especially as it effects the young people who are most at risk on the streets at the moment, remains to be seen. This is not, however, as of yet a revolution of the Iranian kind under Khomeini.

    If I were partying at Davos as a member of the global elite I would be very worried about the unexpected and unpredicted collapse of what everyone assumed were secure regimes in the Middle East. Can these people really say to themselves: “this can’t happen in my country”? Probably a lot of the privileged people at Davos are not yet asking this question, but they should be, and they should start talking about the real possibility of social collapse in the industrialized West. They should talk about it in a way that does not rely on more police and military control over their own societies, though no doubt that is their first instinct in dealing with such a crisis.

    If they can avoid that first instinct, and instead ask themselves what would make young people in the West take to the streets, they might find an answer in the the causes to the financial crisis that erupted in 2007. This crisis according to many of the actors was unpredicted and unexpected – “nobody could have seen this coming” is the refrain of many who were up to their ears in its development and implementation. The Commission says otherwise; it was fully predictable and avoidable. That is true, but we don’t get to the root causes that tentacle back many decades. For example, if you want to know one possible source of disaffection among young people, think about the changes that occurred to the bankruptcy code in the US about five years ago. Banks were successful in making it impossible for those who enter bankruptcy from fully wiping out their debt. Those who lose their homes or can’t manage their credit card bills are still forced to pay back what they owe even under bankruptcy. This is a form of financial servitude for life for many people, and more and more Americans are falling into this trap. Young people see this acutely with student loans, which can never be discharged in bankruptcy, which involve the federal government as the guarantor/enforcer of this form of servitude, and which now seem ironically useless in guaranteeing the borrower a happy and prosperous future as a college graduate. What sort of future, then, do young people have in the US? While they are materially better off than young Egyptians, their future prospects are turning out just as bleak.

    And is anyone at Davos questioning the policies of the Federal Reserve and their contribution to what is happening in Tunisia, Egypt and elsewhere? To the very day Ben Bernanke announced Quantitative Easing II, commodity prices went on a tear, and we have now seen prices for basic foodstuffs such as rice double in many countries, along with increases in cotton, oil, sugar, wheat, and so on. Developing countries simply cannot afford to keep subsidizing such market-oriented increases, and the market in turn decided it can no longer ignore the inflationary, or even hyperinflationary consequences of the US central bank buying up nearly a trillion dollars of its government debt. The riots over these crippling price increases in so many countries are connected intimately to US monetary and fiscal policies.

    These are the types of connections that are not being made between what is happening in Egypt and what has happened in the US and elsewhere in the West that has led to a financial crisis of enormous magnitude. Similarly, our elites are not yet prepared for the possibility that many of them will be swept away in a reform movement every bit as far reaching as the changes that seem to be coming to Egypt as a result of a revolt on the streets by ordinary people.

  • I think these are the fundamental difference between the U.S. and most other countries in the world:

    1) Only the U.S. has a global military in support of its empire. The left in the U.S. is reflexively distrustful of the U.S. military. But, as we see in Egypt, and as we saw in East Europe, the question of whether or not a revolution can by suppressed or not almost always come down to the decision made by the military whether or not to fire on its own people.

    2) The U.S. is still living off the wealth created in the 1950s through 1970s, including most especially the technology spinoffs from the Moon program. That has about run its course, however, with the U.S. no longer clearly leading in ANY important sector of manufacturing industry, or mining. Not even aerospace.

    3) The elites in the U.S. have constructed and nurtured a socio-economic philosophy of economic Darwinism that openly promotes hatred of the poor and underprivileged, and worships mammon. I just really don’t know, but I don’t think there are other countries that include among its population so large, virulent and misguided a chunk of their population as American conservatives and libertarians represent. On this issue, the American Christian churches have been horribly and tragically silent; many have actually been corrupted and have turned their backs on the social teachings of Christ.

    This last point, in particular, leads me to conclude that the possibility of a social upheaval in the U.S. is very unlikely. And rather than seeking to cleanse the churches of its corruption, and attempt to revive the tradition of militant social justice crusading that powered the abolition movement in the 1850s, and the Civil Rights movement a century later, leftists find a posture of militant atheism more congenial.

  • Good points Tony. Military supporting empire based on past expiring wealth.

    Regarding your point #3, “economic Darwinism that openly promotes hatred of the poor and underprivileged, and worships mammon” you ask, where are the churches about this? Well, it looks like the Christian Right supports empire, and uses the Protestant Work Ethic to explain economic Darwinism. Christian soldiers (Onward) must literally defend the empire against darker colored moochers, and any “socialist” teachings ascribed to Jesus must be counteracted.

  • I was inspired by your comment, “This [Objectivism]philosophy. . .is part of a broad trend on the political right to discredit the government and its potential usefulness to society, other than as a tool for the advancement of the narrow individual interests of people of wealth and privilege”, to go looking for J.K. Galbraith‘s statement of the idea some time back: “The modern conservative is engaged in one of man’s oldest exercises in moral philosophy; that is, the search for a superior moral justification for selfishness.”

    The quotation page I found has so many relevant passages that I realized just how inadequate our ideas of progress are and how constant is the moral struggle.

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