Poor decisions by elected officials, less-than-vigilant government regulators and reckless greed by the private sector caused the near collapse of the U.S. economy in 2008, a commission charged with investigating the causes of the crisis has concluded. The news should surprise few, but it is worth taking a cold, hard look at the facts — the worst recession of the last 75 years was man-made and entirely avoidable. Confronting those truths should lead Congress and the president to be just as committed to guarding against these failings as they are in protecting the nation from attack.
The Financial Crisis Inquiry Commission, which included six Democrats and four Republicans, split on the breadth of the blame to assign, but clearly the key elements of the near-crash are not disputed. And the panel’s report includes a dire warning: “The greatest tragedy would be to accept the re-frain that no one could have seen this coming and thus nothing could have been done. If we accept this notion, it will happen again.”
The report was endorsed by the majority Democratic appointees; three Republicans have signed on to a minority report, and the fourth Republican issued his own version. The Republicans may have balked at the majority’s conclusion that the last two Federal Reserve chairmen, Alan Greenspan and Ben Bernanke, appointed by Republican presidents, were culpable in underestimating the risks of the overheating economy.
The majority report spreads the blame around: “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.” But it was especially harsh in its criticism of the Fed: “The prime example is the Federal Reserve’s pivotal failure to stem the flow of toxic mortgages, which it could have done by setting prudent mortgage lending standards. The Federal Reserve was the one entity empowered to do so and it did not.”
The Republican minority report argued that government programs encouraging homeownership created a climate in which consumers borrowed money they could not repay. This certainly was a component of the near crash, but it should not be seen as an indictment of such programs. Providing a path for lower middle-income people to own their own homes is critical to the economy.
In 1932, Congress convened the Pecora Commission to study the causes of the Great Depression to inform regulatory reform efforts. It concluded that conflicts of interest, artificial boosting of stock prices and other nefarious banking practices led to the collapse. The commission’s report led to such reform laws as the creation of the Securities and Exchange Commission and the Glass-Steagall Banking Act of 1933, which was repealed in late 2000 by the Republican-controlled Congress and signed into law by Democratic President Bill Clinton.
In his 1939 memoir, the author of the commission’s report, Ferdinand Pecora, wrote: “Had there been full disclosure of what was being done in furtherance of these schemes, they could not long have survived the fierce light of publicity and criticism. Legal chicanery and pitch darkness were the banker’s stoutest allies.” That much remains true, which is why Congress and the president shouldn’t ignore the report’s recommendations.