Nocera on the Financial Crisis Commission’s Report

Joe Nocera, writing in the New York Times, makes comments on the Financial Crisis Commission’s report not dissimilar to my own:

The F.C.I.C. is the first to take a close look at the missteps at Citigroup, which virtually every book about the financial crisis has overlooked. It is a devastating portrait of negligence at the top — including the once sainted Robert Rubin. It homes in on the unconscionable willingness of federal regulators to look the other way at destructive subprime lending practices. It digs into A.I.G., Goldman Sachs, Merrill Lynch, Lehman Brothers, Moody’s, the Federal Reserve, Countrywide, Ameriquest and others. It’s a very long list.

Which is also one of its key weaknesses: the report has a kitchen sink quality that actually detracts from our ability to truly understand why the crisis took place. In their joint dissent, the three Republican commissioners complain that the report “is more an account of bad events than a focused explanation of what happened and why. When everything is important, nothing is.”

He also takes the minority’s report to task:

Yet the Republican 30,000-foot view of the crisis has its own drawback: it’s so bloodless it’s almost as if they are saying nobody is responsible for the bad things that took place in the years leading up to the crisis. When I spoke to Keith Hennessey, a research fellow at the Hoover Institution and one of the co-authors of the Republican dissent, he told me that he and the other Republicans agreed with many of the investigative thrusts of the final reports. (It didn’t help that the Republicans had only 27 pages to express their views, compared to the Democrats’ 500-plus pages.)

The question, he said, wasn’t whether there were bad actors or fraudulent practices — “of course there were, and they did awful things,” he said — but whether the particular actions of particular people had been the primary reasons for the financial crisis. “If you take that view, then you are saying that the crisis was foreseeable and preventable. I think the real answer is: we don’t know,” Mr. Hennessey said.

As I’ve been trying to explain I do think that the crisis was foreseeable and preventable, I think that those in a position to foresee and prevent it were regulators and the Congress, and distracting from that reduces our ability to prevent a recurrence rather than enhancing it.

Mr. Nocera skewers the minority minority report:

…Peter Wallison, the American Enterprise Institute scholar and the fourth Republican F.C.I.C. commissioner, had already released his own, one-man dissent — a lonely, loony cri de coeur that placed the blame for the financial crisis entirely on Fannie Mae, Freddie Mac and federal home ownership policies, a position so contrary to the facts that even his fellow Republican commissioners did not agree with him.

His conclusion dovetails pretty nicely with mine:

But mass delusions, alas, are part of the human condition, and no report, no matter how scathing, is going to change that.

I emphatically do not believe by that that I blame the victims. I have no objection to pursuing civil and criminal cases against bankers where there is actual wrongdoing. Indeed, I believe these things should be prosecuted to the full extent of the law. I also believe that the Congress and regulators hold positions of trust that go beyond getting re-elected or landing that cushy job at Goldman Sachs. If consumers behave badly, it’s a problem. If Congress and regulators behave badly, it’s a violation of their offices.

12 comments… add one

  • john personna

    Too bad financial oversight is impossible in a culture as diverse as ours.

    lolz, it’s not like we’re Danes! or anything.

  • sam

    Dave:

    As I’ve been trying to explain I do think that the crisis was foreseeable and preventable, I think that those in a position to foresee and prevent it were regulators and the Congress, and distracting from that reduces our ability to prevent a recurrence rather than enhancing it.

    But isn’t the nature of a bubble just that the delusion prevents the foresight? Nocera’s point is that everybody was delusional, and that includes the regulators: “That’s what bubbles are: they’re examples of mass delusions.”

    Maybe what’s really needed in the regulatory agencies is a cadre of historians.

  • john personna

    As the bubble blew in California the market shifted to more and more interest-only loans, and NINJA loans.

    You don’t have to count on bubble-spotting to fix that. You only have to watch the industry go mad.

  • john personna

    BTW, an interesting idea is developing, that the Brits have tried austerity for us and found it lacking.

    Just a few months ago, when we were all discussing the effects of stimulus, I remember saying “well, you can choose austerity if that’s what you really want … but I don’t think you’ll really like it.”

    Austerity ain’t roses.

  • steve

    “As I’ve been trying to explain I do think that the crisis was foreseeable and preventable, I think that those in a position to foresee and prevent it were regulators and the Congress, and distracting from that reduces our ability to prevent a recurrence rather than enhancing it.”

    First, it was the bankers and their affiliates (think AIG) who created and, this is important if you really believe that incentives matter, who benefitted from creating the subprime mess. They figured out how to make lots of money by reducing capital requirements, taking on lots of bad risk and hedging it. Their mathematical models said it would work. The financial community is primarily responsible IMHO.

    Should Congress have foreseen this and stopped it? Maybe. There was a long chain of events going back to at least the 80s that made it more difficult to see what was going on. Derivatives were kept off any kind of exchange/market. The shadow banking sector was essentially unregulated. I think that the stock market tells us that even many insiders did not know how bad things were. (Fama anyone?) At the state level, several attorneys general caught on, but it was the executive branch that cut them off, not Congress. Congress did agree to the request to reduce capital requirements. In order for Congress to stop things, they would have had to pass fairly blunt, comprehensive laws limiting banking activity. We cannot do that even now, after they made this mess.

    The regulators is where I think you are most correct. They should have had the best inside view. However, how effective are they going to be if they also believe that industry should write its own regulations and that minimal regulation is best? I think this is more deep capture than the problem of rotating in and out of jobs, though that does not help.

    (As an aside to prior comments, while I do not think the GSEs a primary problem, I do think that they contributed. I just believe that the bankers found a great way to make money. They were more amoral than immoral. Most really believed their models.)

    Steve

  • john personna

    “They were more amoral than immoral.”

    Well, if they knew they were making loans they would never, ever, keep on their own books, and only made them because someone else would hold the bag, I think that goes beyond amoral.

    They stuck school districts and retirement funds with stinker MBS.

  • During the run-up to the mortgage crisis (from 2004-06, wherebouts), I actually worked in the industry. Not at the banks, but they were our customers. There was an odd split among the people that worked at the company. Some of us looked at the loans we were pushing out in utter bafflement. I personally decided that – despite the fact that my job made me privy to some good interest rates – I wasn’t going to buy a house for a good long time*.

    Yet others – intelligent, thoughtful people… and a majority – really did buy into the notion that this was going to work itself out. That the NINJA loans would, eventually get paid. If the borrower that had to sign this dreadful contract couldn’t, then someone else that could would come along.

    Clearly, there were some bad actors in all of this. One of our main customers was one of them and when they fell, I raised a vindictive glass to their fall. And to the extent that crimes were committed, they should be prosecuted. In my experience, though, a whole lot of people really believed in it. As insane as it sounds.

    * – That being said, even the pessimists did not fully appreciate what it would do to our economy as a whole.

  • Oh, and as it pertains to regulators, I am in complete agreement with Schuler. It’s their job to take a big-picture view. I think that one of the reasons that so many at my former employer bought into it all is that it needed to be true for their professional benefit*. It’s not easy, in that kind of environment, to see through it all. But it’s regulators jobs to do so.

    * – Most of whom are now unemployed. For my part, I knew that my stay there was temporary, which may have helped me see a little further.

  • I believe there are many people who should be held responsible for the crisis as the report suggests. It is the same case as the financial crisis in Greece when the EU officials refused to reveal the information they clearly had about the country’s rising debt but nobody has shouldered the blame thus far.

  • BTW, an interesting idea is developing, that the Brits have tried austerity for us and found it lacking.

    For a professor of economics to base an entire column on the fallacy of correlation equaling causation is sad.

    If their austerity measures are causing them to move towards a recession then why is OUR housing market headed for a double dip recession? We’re practicing the furthest thing from austerity and yet our housing market is still sliding as is our employment base.

    Next he complains about Cameron’s government raising taxes. Well yeah, but this is precisely what leftists wanted to do here.

    The author is simply another partisan Keynesian who, like Krugman, shows that he is willing to twist reality in order to advance his ideological solution.

  • sam

    “The author is simply another partisan Keynesian who, like Krugman, shows that he is willing to twist reality in order to advance his ideological solution.

    And in this impulse partisan Keynesians differ from conservative economists how?

  • john personna

    Wait a minute! Now cross-country comparisons are not good again. I should keep a score card.

    If their austerity measures are causing them to move towards a recession then why is OUR housing market headed for a double dip recession? We’re practicing the furthest thing from austerity and yet our housing market is still sliding as is our employment base.

    We are certainly not practicing the furthest thing from austerity.

    The furthest thing would be to elect Paul Krugman king and run up enough trillions in debt to actually balance our contraction.

    Net-net, our spending has fallen. Federal stimulus has only partially compensated for state, local, and of course private, spending cuts.

Leave a Comment