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The Financial Crisis...the Minority View, Part I
The other day the Financial Crisis Inquiry Commission released its final report on the causes of the financial collapse of 2007-09. Three members of the bipartisan panel did not go along with the majority’s conclusion that the cause was basically all the fault of Wall Street and its influence in Washington, with “greedy bankers knowingly (manipulating) the financial system and politicians in Washington to take advantage of homeowners and mortgage investors alike, intentionally jeopardizing the financial system while enjoying huge personal gains.” So wrote three members who dissented – Bill Thomas, Keith Hennessey and Douglas Holtz-Eakin – in an op-ed for the Wall Street Journal.
So I thought I’d just list some of the points of the minority’s assessment, as put forward by the three. Following is all public information, filed as a dissent in the back of the majority’s opinion. Among the conclusions of Thomas, Hennessey and Holtz-Eakin:
The (majority) report largely ignores the credit bubble beyond housing. Credit spreads declined not just for housing, but also for other asset classes like commercial real estate. This tells us to look to the credit bubble as an essential cause of the U.S. housing bubble. It also tells us that problems with U.S. housing policy or markets do not by themselves explain the U.S. housing bubble.
There were housing bubbles in the United Kingdom, Spain, Australia, France and Ireland [Ed. exactly what I was reporting in my “Week in Review” column going back to 2005], some more pronounced than in the United States. Some nations with housing bubbles relied on American-style mortgage securitization. A good explanation of the U.S. housing bubble should also take into account its parallels in other nations. This leads us to explanations broader than just U.S. housing policy, regulation, or supervision. It also tells us that while failures in U.S. securitization markets may be an essential cause, we must look for other things that went wrong as well.
Large financial firms failed in Iceland, Spain, Germany, and the United Kingdom, among others. Not all of these firms bet solely on U.S. housing assets, and they operated in different regulatory and supervisory regimes than U.S. commercial and investment banks. In many cases these European systems have stricter regulation than the United States, and still they faced financial firm failures similar to those in the United States.
[So] If the political influence of the financial sector in Washington was an essential cause of the crisis, how does that explain similar financial institution failures in the United Kingdom, Germany, Iceland, Belgium, the Netherlands, France, Spain, Switzerland, Ireland, and Denmark?
How can the “runaway mortgage securitization train” detailed in the majority’s report explain housing bubbles in Spain, Australia, and the United Kingdom, countries with mortgage finance systems vastly different than that in the United States?
How can the corporate and regulatory structures of investment banks explain the decisions of many U.S. commercial banks, several large American university endowments, and some state public employee pension funds, not to mention a number of large and midsize German banks, to take on too much U.S. housing risk?
How did former Fed Chairman Alan Greenspan’s “deregulatory ideology” also precipitate bank regulatory failures across Europe?
Stages of the Crisis
As of December 2010, the United States is still in an economic slump caused by a financial crisis that first manifested itself in August 2007 and ended in early 2009. The primary features of that financial crisis were a financial shock in September 2008 and a concomitant financial panic. The financial shock and panic triggered a severe contraction in lending and hiring beginning in the fourth quarter of 2008.
Some observers describe recent economic history as a recession that began in December 2007 and continued until June 2009, and from which we are only now beginning to recover. While this definition of the recession is technically accurate, it obscures a more important chronology that connects financial market developments with the broader economy. We describe recent U.S. macroeconomic history in five stages:
--A series of foreshocks beginning in August 2007, followed by an economic slowdown and then a mild recession through August 2008, as liquidity problems emerged and three large U.S. financial institutions failed;
--A severe financial shock in September 2008, in which ten large financial institutions failed, nearly failed, or changed their institutional structure; triggering
--A financial panic and the beginning of a large contraction in the real economy in the last few months of 2008; followed by
--The end of the financial shock, panic, and rescue at the beginning of 2009; followed by
--A continued and deepening contraction in the real economy and the beginning of the financial recovery and rebuilding period.
As of December 2010, the United States is still in the last stage. The financial system is still recovering and being restructured, and the U.S. economy struggles to return to sustained strong growth.
I’ll continue with the minority’s report in two weeks.
Source: The Financial Inquiry Commission Crisis…Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States