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Is it Our Fault Too? Who/What Caused the Financial Crisis?

Is it Our Fault Too? Who/What Caused the Financial Crisis?

The last word and testament of the Financial Crisis Inquiry Commission, set up to clarifying the causes of the 2007-08 meltdown, is out today. (Download it here; or, if you prefer your 500-page reports in handy book form, buy it here.) After a year-and-a half’s work, including 700 interviews, 19 days of public hearings, and millions of pages of documents reviewed, the panel concluded that the crisis was avoidable, and that there’s plenty of blame to go around, starting with the financial industry, government (de)regulators, and the Fed. (Actually, make that the 6 Democrats on the 10-member panel; the four Republicans declined to endorse the majority position on account of its being–big surprise here–too hard on the banks; in fact, they didn’t even agree among themselves, producing two dissents, both included in the final doc.)

From the intro:

“The crisis was the result of human action and inaction, not of Mother Nature or computer models gone haywire. 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. While the business cycle cannot be repealed, a crisis of this magnitude need not have occurred. To paraphrase Shakespeare, the fault lies not in the stars, but in us.”

Despite the expressed view of many on Wall Street and in Washington that the crisis could not have been foreseen or avoided, there were warning signs. The tragedy was that they were ignored or discounted. There was an explosion in risky subprime lending and securitization, an unsustainable rise in housing prices, widespread reports of egregious and predatory lending practices, dramatic increases in household mortgage debt, and exponential growth in financial firms’ trading activities, unregulated derivatives, and short-term “repo” lending markets, among many other red flags. Yet there was pervasive permissiveness; little meaningful action was taken to quell the threats in a timely manner.”

And here’s what else:

  • widespread failures in financial regulation and supervision proved devastating to the stability of the nation’s financial markets.
  • a combination of excessive borrowing, risky investments, and lack of transparency put the financial system on a collision course with crisis.
  • the government was ill prepared for the crisis, and its inconsistent response added to the uncertainty and panic in the financial markets.
  • there was a systemic breakdown in accountability and ethics.

It’s hard to know what, really, to make of all this. Like it or not, the panel’s partisan split hurt its credibility in a big way, even if the majority narrative is 100 percent accurate. No doubt it adds to our understanding of what happened, but even in the best case the report was never going have much practical impact, since financial reform has already passed. Onto the shelf it goes.

This post first appeared at the site of our partners, the Progressive Book Club.

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by JULIAN BROOKES

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34 comments

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8:23PM PST on Feb 24, 2011

"Is it our fault too?" HELL, NO. I am sick of blame being spread around to ALL Americans.

Most middle-class and poor Americans did not know what Wall St. and the banks were doing, because most people are not knowledgeable about financial shenanigans, the way they play them. Goldman Sachs who bet on mortgages to fail? What kind of financial transaction is that? Greed, pure and simple.

So, NO, the average American, the 98%, did not contribute to the recession. I put savings into mutual funds, saving for my retirement, like the good American I was told to be, and I lost hard-earned money (I'm a nurse, and believe me, it's hard-earned) when the markets crashed. And it was all because of risky and greedy men at the top. THEY AND ONLY THEY are to blame. And have they payed us back? NEVER.

And now those same bastards are lobbying to get money from the fund they see that has money -- Social Security, the only retirement we have left! -- and one, that all us workers, have paid into for a lifetime. The gall. How do they sleep at night? And how do they think this will continue forever for them? When they wreck the American economy, they wreck themselves eventually. Unless the ultimate goal is a dictatorship.

8:11AM PST on Feb 4, 2011

I read Jim Hightower's newletter, the "Hightower Lowdown", every month. I totally agree with him that we need a Financial Speculation Tax. A lot of people don't know this, but 87% or better of the transactions on Wall St. are made by multi-millionaires/billionaires. He proposed a .1% tax on all speculative transactions (transactions that don't directly go towards development).
This would do two things: First, it would cut down on these rich idiots playing the market like it was their private horsetrack and Second, it would generate up towards $300 billion/yr to pay back our debt.
They got their tax relief by blackmailing our "congress critters", let 'em pay this way!

10:29AM PST on Feb 1, 2011

What a load of crap. The Federal Banking Deregulation Act was written by Phil Gramm, a Republican, and banking lobbyists. It was voted into law by a Republican-controlled House and Senate, and signed into law by a Republican president. It was this act that allowed the banks to create our latest recession, nothing else. To say otherwise proves that one is either ignorant or a liar.

3:05PM PST on Jan 31, 2011

I'll never understand how/why conservatives keep insisting that conservative organizations and outlooks/ideologies are to their benefits, when in EVERY example, they side with those with the largest coffers.

11:06AM PST on Jan 31, 2011

That's right it was Barney Frank for one and Hillary also. They did this to the country, and how they could vote Frank back into office is beyond me. This shows what the liberals are about, Frank is a liar and a crook.

6:10PM PST on Jan 30, 2011

The financial mess is the result of 30 + years of republican miss managment and systematic deregulation. I started with Reagan, and has been the mantra of the republiskunks ever sense. We need MASSIVE re regulation. If we do not, the collapse that Obama stopped will continue in to the gutter.

1:25PM PST on Jan 30, 2011

"The crisis was the result of human action and inaction, not of Mother Nature or computer models gone haywire. 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."
Bull! Their greed caused it and they are busy already working on the next collapse, (think trillions in magical derivatives), for "we the people" to pay for.
Maybe, "we the people" will finally wake up.

10:58AM PST on Jan 30, 2011

I moved to Canada from the U.S. in 2001. It was interesting to listen to the economic debates here as there were many who wanted to "ditch" the old system and be more like the U.S. I don't understand the fine details on this, but in the early 1900's Canada and the U.S. had the same kind of banking system and the U.S. changed, but Canada did not.

The cry for change here in Canada was that the system was old, out of date and stodgy. However, they kept their rules that you had to have a 10% down payment for a mortgage and many other strict credit rules and they did not change the system.

Voila, Canada had a bump in 2009, but overall, not much changed here and there have not been many problems....no mass foreclosures or major job losses. Sometimes the old, staid ways are the best. Unfortunately, it is always hard to "go back" when something has been "reformed". It's too bad because that should be the first step for the U.S., go back to the system that was in place in the early 1900's.

Time will tell, but I think the U.S. has a lot of work to do and they have to wrap their head around the fact that they are just a country now, not the best.....and I'm not so sure they ever were.

10:50AM PST on Jan 30, 2011

Horse Shi*!! Why are so many of you willing to blame the victims? It was the criminal elements in the financial industry, aided and abetted by the scalawags voted into office that are TOTALLY responsible. Fortunately I knew those so called "expert advisors" were full of *hit when they wanted me to put my life savings in the "market" so the thugs on Wall Street could steal it. I even told THEM the stock market was going to go DOWN, not up. They lost THEIR life's savings if they really believed the crap they spewed.

9:03AM PST on Jan 30, 2011

Of all the points made, the blanket statement that people entered into mortgages they couldn't afford, and that banks were "pressured" into making them is pure B.S.
While there are undoubtedly a minority of cases like that, most people were led to believe that they COULD afford them based on the "realities" of that time. They had good long-term, seemingly secure jobs. They trusted "professionals" in the finance industry to make judgements based on sound understanding of that industry and the way the economy works. Few entered into mortgages thinking the bank they were borrowing from would cut funding for the company they worked for, eliminating the job they counted on to pay that mortgage.
Instead, these "professionals" were no more than syndicates of Madoff-like "ponsi" schemes, but with government charters and loose regulations that allowed them to operate with insuffient capital backing and insurance. There was no "risk" for them that they couldn't pass on to the next sucker. That sucker turned out to be the taxpayer.
The taxpayers bit the bullet and bailed out the schemers to save "the economy", but once they were bailed out, they circled the wagons and used their massive bailouts not to mitigate the problems they caused their benefactors, but to buy candidates who would kill any meaningful reforms to the system that served the financial "services" industry so well, and kept their losses at a minimum.

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