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Documenting an ‘avoidable’ crisis

Documenting an ‘avoidable’ crisis

US panel fixes blame for financial crisis on Wall Street, regulators

by Darrell Delamaide

Thu 27 Jan 2011

It hasn’t been a great time for bipartisan commissions in the US, given the political polarisation in Washington. The deficit commission late last year failed to reach a consensus that would have required Congress to take action and President Obama’s passing reference to its recommendations in his State of the Union speech will probably be the last we hear of them.

Now the Financial Crisis Inquiry Commission is releasing its massive 576-page report this week with the endorsement of only the six Democratic members of the 10-member panel. According to press leaks, the report, based on 19 days of hearings with more than 700 witnesses, concludes that the financial crisis was avoidable.

“The crisis was the result of human action and inaction, not Mother Nature or computer models gone haywire,” press reports quote the commission as saying. “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.”

Following what would appear to be a consensus in public opinion regarding the crisis, the report blames wildly imprudent mortgage lending, exotic instruments on Wall Street, malfeasance by credit rating agencies, and dereliction of duty by regulators, notably the Federal Reserve and the Securities and Exchange Commission.

The Republican members of the commission, after fancifully voting in December that the words “Wall Street” should be excluded from the report, are crafting dissenting reports. One Republican member, Peter Wallison, will issue a third report all his own, based on his obsession of many years about the evils of government-sponsored mortgage lenders Fannie Mae and Freddie Mac.

None of the commission members has any political heft. The chairman, former California Treasurer Phil Angelides, reached his high-water mark in losing disastrously against former Governor Arnold Schwarzenegger when he ran for re-election in 2006. One of the Republican members, Douglas Holtz-Eakin, was chief economic adviser to John McCain during the 2008 presidential campaign – responsible for the issue which cost McCain his last shred of credibility as a candidate.

While its conclusions are hardly surprising, the very sweep of the FCIC’s documentation should have an impact. Backing up the overall message, the late release of transcripts from the 2005 meetings of the Federal Open Market Committee, the Fed panel that determines monetary policy, showed indeed that officials at the central bank were aware of a potential housing bubble, but grossly underestimated its potential impact.

The commission report specifically faults both former Fed chairman Alan Greenspan for negligence with regard to “the flow of toxic mortgages” and his successor, Ben Bernanke, for his failure to foresee the developing crisis.

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