While I am hesitant to grade the Financial Crisis Inquiry Commissions Report because it covers so much ground, it is great reading for those of us interested in the topic. Unfortunately, it checks in at 662 pages as a pdf file, including footnotes. The main report is filled with anecdotes, active prose, boring prose, and some terse, accurate summaries. As an example I completely agree with: “In Washington, four intermingled issues came into play that made it difficult to acknowledge the looming threats. First, efforts to boost homeownership had broad political support . . . . Second, the real estate boom was generating a lot of cash on Wall Street and creating a lot of jobs in the housing industry at a time when performance in other sectors of the economy was dreary. Third, many top officials and regulators were reluctant to challenge the profitable and powerful financial industry. And finally, policy makers believed that even if the housing market tanked, the broader financial system and economy would hold up.” This seems spot on.
But I also agree with the minority report by Hennessey, Holtz-Eakin, and Thomas, that “the majority’s approach to explaining the crisis . . . is too broad.” The main report blames everything that anyone has ever blamed for the financial crisis and Great Recession. It tells a nice story, but one has to wonder if some of the characters are really necessary. The first dissenting report is more focused. And it provides some evidence against the causal factors that they do not see as central. The main report rounds up all the suspects in the living room, the first dissenting report tells one story of who was involved in committing the crime.
There is also a final dissenting report by Wallison, which holds the view that government housing policy is to blame and that the private sector, while woefully inept, is blameless. Bankers and investors who bought the assets were 1) simply trying to compete with the government (presumably to see who could lose the most money?) and 2) are rather dumb (“Human beings have a tendency to believe that things will continue to go in the direction they are going”). Wallison does not blame stupidity nor the factors that made banks “especially vulnerable” to the initial losses. But stupidity can cause crises, and if we see it, it is a cause and we should look for deeper reasons why it was able to survive and grow big – where were the market forces for smarts? But I agree with this report when it says that “opinions in general are not worth much” and are not substitutes for data.
The document is mostly a call to arms for real data work. As more and more data become available, we can parse the large set of hypothetical causal factors to determine which were instrumental and which factors, if eliminated, would have made little difference. For example, would eliminating outright fraud and corruption in mortgage origination have helped significantly? Or is this a major concern to those defrauded but only a small part of the macroeconomic fallout? Or consider the role of credit rating agencies. Given that AIG was supporting the mortgage market by insuring hundreds of billions of MBS and CDO’s on MBS, and given that the investment banks themselves were happy to hold off balance sheet and write insurance on lots more of these assets, was credit rating a problem because no one knew that these AAA assets were pretty risky or because the credit rating agencies were convincing an otherwise skeptical world that these assets were safe? Some popular writing suggests that both buyers and sellers wanted these assets to be highly rated. Maybe the credit rating agencies should have known better, but it might have made little difference if they did not exist. Only hard analysis will tell.