The Financial Crisis Inquiry Commission (FCIC) that was established in the spring of 2009 to explore the causes of the previous year's financial meltdown, released its findings today. What was to blame for the crisis, they say?
Widespread failures in financial regulation, including the Federal Reserve's failure to stem the tide of toxic mortgages; Dramatic breakdowns in corporate governance including too many financial firms acting recklessly and taking on too much risk; An explosive mix of excessive borrowing and risk by households and Wall Street that put the financial system on a collision course with crisis; Key policy makers ill prepared for the crisis, lacking a full understanding of the financial system they oversaw; and systemic breaches in accountability and ethics at all levels.
The crisis, in short, was "avoidable" if only bankers and regulators had done their jobs properly. Except not all of the commission's members agreed. In fact, all of the Republican members refused to endorse this report.
Three of them published a separate report that attributed blame to the Federal Reserve. The fourth drew his own conclusions and pointed at the heavy involvement of government in inflating the housing bubble that upset financial markets. Republicans agree that the semipublic mortgage agencies Fannie Mae and Freddie Mac played an instrumental role in the process.
The commission, as Federal Reserve Chairman Ben Bernanke before it, cites "regulatory failure" as setting the stage for the crisis. Yet the trouble began in one of the most heavily regulated sectors of the American economy---the housing market.
The first decade of this century saw President George W. Bush's attempt to bring about his "ownership society" and the country is still suffering from the results of that experiment today.
With consistent, all time low interest rates set by the Federal Reserve and with an enormous increase in size and scope of the government-sponsored enterprises Fannie Mae and Freddie Mac, Washington promoted homeownership by artificially extending credit to people that could never dream of affording their own house---let alone pay back their loans.
That is not to say that the private sector is free of blame. But consider that Fannie and Freddie, supposedly privately owned, were publicly chartered and represented the archetype of unfair competition.
Consider the Community Reinvestment Act of 1977 that "encouraged" banks to lend to uncreditworthy borrowers and sought to end "discriminatory" credit practices against low income neighborhoods.
And consider that the very banks who let themselves be pressured into participating in this madness were "bailed out" by the government with billions of dollars of taxpayers' money. Was this a free market at work?
In a truly free market, failure is possible and consumers are aware of the risk---with the result that they rationally and voluntarily assume less of it. What the US economy needs is not more government oversight. What is needs is more personal responsibility.