When was the last time you held a 662-page book? (At least one that wasn't written by Stieg Larsson.) If you feel it’s been too long since you read something of that size, then start printing out the entire 662 page Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States, which was released today.
The report’s purpose is to “provide a historical accounting of what brought our financial system and economy to a precipice and to help policy makers and the public better understand how this calamity came to be.”
If you lost your job during the Great Recession, or if you or a relative lost your home as a result of the mortgage meltdown, then there are definitely a few chapters in the Final Report you will want to read (and hope that your Congressman reads, too). And if you made it through the last couple of years in one piece and escaped the worst of the economic bad news, you will still want to take a look at this document.
The Final Report is long, yes – but it is thorough, it is detailed and it will stand, at least for the time being, as the most complete account that we have of the causes of the Great Recession.
The Commission that authored the report was created in 2009. Six members of the commission were selected by Congressional Democrats, while the other four were named by the Republicans in Congress.
The Commission’s conclusions are as follows:
We conclude this financial crisis was avoidable.
We conclude widespread failures in financial regulation and supervision proved devastating to the stability of the nation’s financial markets.
We conclude dramatic failures of corporate governance and risk management at many systemically important financial institutions were a key cause of this crisis.
We conclude a combination of excessive borrowing, risky investments, and lack of transparency put the financial system on a collision course with crisis.
We conclude the government was ill prepared for the crisis, and its inconsistent response added to the uncertainty and panic in the financial markets.
We conclude there was a systemic breakdown in accountability and ethics.
We conclude over-the-counter derivatives contributed significantly to this crisis.
We conclude the failures of credit rating agencies were essential cogs in the wheel of financial destruction.
We conclude collapsing mortgage-lending standards and the mortgage securitization pipeline lit and spread the flame of contagion and crisis.
I am delighted that the Final Report highlights the destructive role of complex, exotic financial instruments in sparking the Great Recession. I hope this central point does not become lost in the debate and reaction to the commission’s findings.
Not surprisingly, the commission members split on party lines in assigning blame for the Great Recession, so the Final Report is accompanied by a spirited dissent from the GOP-affiliated commission members. They complain that the majority commission members have been “too broad” in trying to determine where fault for the Great Recession lies.
The dissenting commission members say that “not everything that went wrong during the financial crisis caused the crisis, and while some causes were essential, others had only a minor impact. Not every regulatory change related to housing or the financial system prior to the crisis was a cause…As an example, non-credit derivatives did not in any meaningful way cause or contribute to the financial crisis. Neither the Community Reinvestment Act nor removal of the Glass-Steagall firewall was a significant cause. The crisis can be explained without resorting to these factors.”
Many pundits will be commenting on the report. As the talking heads on TV take sides between the Financial Crisis Inquiry Commission’s majority and minority members, read the report, then read the dissent, and decide for yourself who has the stronger case.