Business Costs & Regulation

Financial Crisis Probe Misses Mark

Politicians and others are stuck in the blame game, rather than working to fix fix root causes

Almost typical of Washington hearings when financial titans are called to task to publicly answer for a mess, last week’s Financial Crisis Inquiry Commission hearings quickly devolved into political theater with almost predictable video clips of Mr. Chairman vs. the Multimillionaire.

The commission would have done little good anyway. At least part of the reason behind its creation was to look tough and make witnesses at least squirm a bit for the cameras.

By the time it even comes out with its report Dec. 15, Congress will have already made up its mind on financial reform, rushing to meet the election calendar. The report won’t be as widely read as the 9/11 Commission Report or effect the same level of change as the Depression’s Pecora Commission.

The bungled timing is emblematic of how, in the two years since Bear Stearns went under, thoughtful analysis has been sacrificed to a flurry of slapped together regulatory fixes and rushed out financial crisis best sellers. So it is especially disappointing that the commission is squandering the opportunity to provide a nonpartisan, clear-eyed assessment of what went wrong.

Witnesses at the hearing, which centered on the housing problems that led to bank failures, spent more time finger pointing than soul searching. Former Federal Reserve Chairman Alan Greenspan blamed mortgage giants Fannie Mae and Freddie Mac. Executives at those firms blamed the administration’s aggressive homeownership goals. Citibank executives offered sheepish mea culpas before turning their aim on regulators. The credit rating agencies were pretty much universally maligned.

Those tired explanations and half-truths simply rehash entrenched positions staked out by different sides early in the crisis. In reality, Fannie’s and Freddie’s shares of subprime mortgage originations actually started falling in 2003 as private lenders picked up the slack. The Community Reinvestment Act catches some blame, too, for easing credit too much in urban areas, but that doesn’t explain why there are so many foreclosures in the sprawling suburbs of Las Vegas and Phoenix.

Even more pernicious is the fact that all of last week’s well rehearsed testimony misses larger structural problems in the mortgage market. Tax policies encouraged not only homeownership, but also home equity lines of credit. Low interest rates fueled loose lending and adjustable rate mortgages, which George Mason University’s Todd Zywicki points to as the source of the first wave of foreclosures. Overly sweet incentives throughout the system meant that when home prices dropped from the stratosphere, homeowners with little equity to begin with and too pricey mortgages simply stopped paying the bills.

Sure, credit rating agencies, regulators and banks were foolish to rely on models that assumed home prices would forever go up. If last week’s hearings could have done any good, they would have reminded us that the stability of our financial system should not entirely rely on fallible human judgment. But the lessons will fall on deaf ears. Financial regulatory reform now making its way through Congress does little to address the structure of finance and instead simply hands error prone humans even more discretion.

Because the reform bill doesn’t get around the fact that bubbles are hard to spot and even harder to pop, it will not be very helpful in heading off the next crisis. At last week’s testimony, even Greenspan admitted he got things wrong 30% of the time. You’d get better odds at the Kentucky Derby. As housing economist Thomas Lawler reminded me, in 2005, when subprime mortgage originations peaked at $625 billion, “There were a lot of people who were not complete idiots, saying there wasn’t a bubble.”

Most Popular

What Are the Income Tax Brackets for 2022 vs. 2021?
tax brackets

What Are the Income Tax Brackets for 2022 vs. 2021?

Depending on your taxable income, you can end up in one of seven different federal income tax brackets – each with its own marginal tax rate.
September 20, 2022
Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
I’ve Inherited a Lot of Money. Now What?
estate planning

I’ve Inherited a Lot of Money. Now What?

First, put all major decisions on hold. A financial planner can help you come up with a plan that addresses your goals, dreams and needs.
September 25, 2022

Recommended

Is Relief from Shipping Woes Finally in Sight?
business

Is Relief from Shipping Woes Finally in Sight?

After years of supply chain snags, freight shipping is finally returning to something more like normal.
September 23, 2022
What Will Happen With Health Costs in 2023
Business Costs & Regulation

What Will Happen With Health Costs in 2023

Higher drug costs will accelerate health insurance premium increases.
August 15, 2022
Most-Overlooked Tax Deductions and Credits for the Self-Employed
Tax Breaks

Most-Overlooked Tax Deductions and Credits for the Self-Employed

If you've recently gone into business for yourself, don't miss these tax breaks for the self-employed.
June 11, 2022
25 Best College Majors for a Lucrative Career
college

25 Best College Majors for a Lucrative Career

One way to increase your chances of earning a good living is to pick a college major that prepares you to work in a field that pays well. Here are som…
May 31, 2022