Faulty financials
The federal commission investigating the financial meltdown of 2007-08 seems to be melting down too. Its four Republican appointees issued a “primer” on the economic crisis Wednesday, a month after the full commission voted (along party lines) to delay its final report until January. The primer is a superficial effort that sounds the usual GOP theme — blame the government! — and downplays the missteps and malfeasance by the financial industry. What’s more disappointing than the release of such a half-baked report, though, is the fact that members of the Financial Crisis Inquiry Commission apparently can’t set aside their political differences in order to reach common ground on the basic facts of the crisis.
The four authors — two conservative economists, a conservative scholar and former GOP Rep. Bill Thomas of Bakersfield — split with the six Democratic appointees in part because the majority was “building a hit piece” for partisan purposes, Thomas told the Wall Street Journal. The oversimplified primer, however, reads like a whitewash. It blithely observes that banks, investors and ratings agencies underestimated the risk of the housing bubble bursting, but offers no insight into why. Nor does it try to explain, or even discuss, why lenders and Wall Street banks abandoned traditional underwriting standards, why ratings agencies blessed even the most toxic mortgage-backed securities, or how the Federal Reserve’s low interest rates promoted risky investing.
That the four would largely absolve Wall Street firms of any fault isn’t surprising — they reportedly sought to have the commission omit the terms “Wall Street” and “deregulation” from its final report. Instead, they point their fingers at government policies that encouraged home buying and pushed investors “toward investing in mortgage debt.”
It’s a familiar refrain but one that ignores the evidence that countries across Europe experienced housing bubbles at the same time as the U.S. — a phenomenon that can’t be blamed on Fannie Mae and Freddie Mac. Yes, those agencies played a role in the problems here, but they didn’t trigger the explosion in subprime and low-documentation mortgages — Wall Street firms did — nor were they the leading sources of risky mortgage-backed securities during the boom.
That’s not to defend Fannie, Freddie or the policies in Washington that promoted homeownership to a dangerous extreme. It’s to say that the picture painted by the commission’s minority is distressingly simplistic. The value of the deficit-reduction plan developed recently by a White House panel stems largely from the support of a bipartisan majority of its members. Similarly, the value of the financial crisis commission’s work will depend on its ability to get past the ideologies on both sides.
