(CN) – A congressional commission issued a 662-page report on the ongoing financial and economic crisis in United States, targeting the corporate greed at the leading banks and investment houses as “a key cause of this crisis.” Meant to be a bipartisan study, the outnumbered Republicans issued two dissenting opinions.
The government appointed the 10-member Financial Crisis Inquiry Commission, led by Chariman Phil Angelides, as part of Congress’ Fraud Enforcement and Recovery Act of May 2009. It is composed of private citizens with experience in areas such as housing, economics, finance, market regulation, banking and consumer protection.
Six members of the commission, all appointed by Democrats, authored the majority opinion, which notes that the crisis was avoidable and could have been prevented by tougher regulation.
“The crisis was the result of human action and inaction, not of Mother Nature or computer models gone haywire,” the report states. “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 While the business cycle cannot be repealed, a crisis of this magnitude need not have occurred.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.”
Warning signs, which were missed or ignored, included the 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’ activities.
The report notes how the Federal Reserve’s failed to stem the flow of toxic mortgages by setting prudent mortgage-lending standards.
“The Federal Reserve was the one entity empowered to do so and it did not,” according to the report. “The record of our examination is replete with evidence of other failures. … What else could one expect on a highway where there were neither speed limits nor neatly painted lines?”
Also at fault, the Democratic commissioners note, was the widely accepted faith in the markets’ allegedly self-correcting nature and financial institutions’ attempts to police themselves.
“More than 30 years of deregulation and reliance on self-regulation by financial institutions, championed by former Federal Reserve chairman Alan Greenspan and others, supported by successive administrations and Congresses, and actively pushed by the powerful financial industry at every turn, had stripped away key safeguards, which could have helped avoid catastrophe,” the report states.
The report also notes that the Securities and Exchange Commission could have required more capital and halted risky practices at the big investment banks. Regulators could have clamped down on banks excesses, and policymakers could have teamed with regulators to stop “the runaway mortgage securitization train.”
“In case after case after case, regulators continued to rate the institutions they oversaw as safe and sound even in the face of mounting troubles, often downgrading them just before their collapse,” the report states. “And where regulators lacked authority, they could have sought it. Too often, they lacked the political will – in a political and ideological environment that constrained it – as well as the fortitude to critically challenge the institutions and the entire system they were entrusted to oversee.
Included in the report are two dissenting opinions, one 29-page dissent authored by three members of the 10-person panel and one 108-page dissent authored by Commissioner Peter Wallison, a fellow in financial policy studies at the American Enterprise Institute. All four dissenters are leading Republicans.
The three-person dissent was written by Commissioner Keith Hennessey, Commissioner Douglas Holtz-Eakin and Vice Chairman Bill Thomas. They argued that their colleagues behind the majority report had cast too broad a net.
“Not everything that went wrong during the financial crisis caused the crisis, and while some causes were essential, others had only a minor impact,” the dissent states. “Not every regulatory change related to housing or the financial system prior to the crisis was a cause. The majority’s almost 550-page report is more an account of bad events than a focused explanation of what happened and why. When everything is important, nothing is.”
Noting that the credit bubble appeared both in America and Europe, the dissent states that America’s inadequate regulation cannot explain the crisis. It instead points out 10 essential factors that caused the economic crisis, including the credit bubble, the housing bubble, nontraditional mortgages, and credit ratings and securitization. The dissent also critiques how the leading U.S. financial institutions amassed highly correlated housing risks while holding too little capital, as well as the too-big-to-fail mantra, common shock. It notes, finally, that the financial panic caused a contraction that set off the economic crisis.
In Wallison’s solo-dissent, he notes that Congress and President Barack Obama had already acted by passing the Dodd-Frank Act “without seeking to understand the true causes of the wrenching events of 2008.”
Wallison contends that the majority report took the easy way out by casting the usual suspects as the villain in its report while failing to “seriously investigate any other cause … [or] effectively connect the factors it investigated to the financial crisis.”
“The majority’s report covers in detail many elements of the economy before the financial crisis that the authors did not like, but generally fails to show how practices that had gone on for many years suddenly caused a worldwide financial crisis,” Wallison wrote. “In the end, the majority’s report turned out to be a just-so story about the financial crisis, rather than a report on what caused the financial crisis.” (Emphasis in original.)
Wallison insists that the government’s housing policy is the catalyst that set crisis in motion, arguing that it “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,” Wallison wrote.