Which narrative presented by Douglas Elliott and
Martin Baily of the Brookings Institute in
Telling the Narrative of the Financial Crisis: Not Just a Housing Bubble
best represents the causes of the Financial Crisis?
|It was the fault of the government||It was Wall Street’s fault||“Everyone” was at fault: Wall Street, the government, and our wider society.||None of the Three Narratives.|
Which FCIC View best represents the causes of the Financial Crisis?
|Majority Conclusions||Dissenting Views By Hennessey, Holtz-Eakin & Thomas||Dissenting Views By Wallison||None of the Three Views|
3. The Global Financial Crisis effectively ended in the year
2009 - Phillip Anderson, Nolan McCarty, and Christine Richard (the "crisis" which began with the collapse of the subprime market ended at some point in 2009)
2010 - Fred Foldvary, Johan Lybeck, Assaf Razin, Christopher Thornberg, and Richard Vague
2011 - Larry Allen ("economic" crisis is still on going)
or, I believe the Global Financial Crisis is ongoing and will end in the year
2013 or beyond - Viral Acharya, Dean Baker, Clive Boddy, Roddy Boyd, Aaron Brown, Ludwig Chincarini, Aaron Clarey, Jesse Colombo, Jerry Davis, Vox Day, Kevin Dowd, Larry Doyle "latter half of this decade", James Galbraith, Isaac Gradman, Jeremy Hammond "no recovery", Robert Hardaway, Fred Harrison, Michael Hirsh "no projected end", Steve Keen, James Kwak "in its broadest sense", Nye Lavalle, Les Leopold, Ross Levine, Michael Lim Mah-Hui, Robert Litan, Francis Longstaff, Matthew Lynn "until 2031", Jacob Madsen, Yalman Onaran, Ann Pettifor, Edward Pinto, Nomi Prins, Donald Rapp, Jay W. Richards, Robert Rodriguez, Richard Roll, John Rubino, Nicholas Ryder, Hersh Shefrin, Laurence Siegel, Paul Sperry, John Talbott "far beyond 2013", Peter Tanous, and John Wasik "we'll keep paying for a generation," and Matthew Watson.
4. What were the primary causes of Global Financial Crisis? (The initial sample only)
5. What still needs to change as a result of the crisis? (The initial sample only)
Participants list (Crisis Expert Qualification)
- Viral Acharya (Book Author)
- Larry Allen (Book Author)
- Phillip Anderson (Book Author)
- Dean Baker (Crisis Predictor & Book Author)
- Clive Boddy (Book Author & Published Paper)
- Roddy Boyd (Book Author)
- Aaron Brown (Book Author)
- Ludwig Chincarini (Book Author)
- Aaron Clarey (Book Author)
- Jesse Colombo (Crisis Predictor)
- Jerry Davis (Book Author)
- Vox Day (Crisis Predictor & Book Author)
- Kevin Dowd (Book Author)
- Larry Doyle (Book Author)
- Fred Foldvary (Crisis Predictor)
- James Galbraith (Book Author)
- Isaac Gradman (Book Editor)
- Jeremy Hammond (Book Author)
- Robert Hardaway (Book Author)
- Fred Harrison (Crisis Predictor & Book Author)
- Michael Hirsh (Book Author)
- Steve Keen (Crisis Predictor & Book Author)
- James Kwak (Book Author)
- Nye Lavalle (Crisis Predictor)
- Les Leopold (Book Author)
- Ross Levine (Book Author & Published Paper)
- Michael Lim Mah-Hui (Book Author)
- Robert Litan (Published Paper & Book Editor)
- Francis Longstaff (Published Paper)
- Johan Lybeck (Book Author)
- Matthew Lynn (Book Author)
- Jacob Madsen (Crisis Predictor)
- Nolan McCarty (Book Author)
- Yalman Onaran (Book Author)
- Ann Pettifor (Crisis Predictor & Book Author)
- Edward Pinto (Research Paper cited in FCIC report)
- Nomi Prins (Book Author)
- Donald Rapp (Book Author)
- Assaf Razin (Book Author)
- Christine Richard (Book Author)
- Jay W. Richards (Book Author)
- Robert Rodriguez (Crisis Predictor)
- Richard Roll (Published Paper)
- John Rubino (Crisis Predictor & Book Author)
- Nicholas Ryder (Book Author)
- Hersh Shefrin (Published Paper)
- Laurence Siegel (Published Paper & Book Editor)
- Paul Sperry (Book Author)
- John Talbott (Crisis Predictor & Book Author)
- Peter Tanous (Book Author)
- Jennifer Taub (Book Author)
- Christopher Thornberg (Crisis Predictor)
- John Train (Published Paper & Book Author)
- Richard Vague (Book Author)
- John Wasik (Book Author)
- Matthew Watson (Book Author)
Some additional publicly stated opinions.
- Sheila Bair answered the questions "Who and what caused the economic crisis?" in Greed, Bailouts, and the Causes of the Financial Crisis from USNews (1/4/2013) by starting with "Greed and shortsightedness were the two overarching causes." Bair previously argued in Short-termism and the risk of another financial crisis (7/8/2011) in the WP that "The common thread running through all the causes of our economic tumult is a pervasive and persistent insistence on favoring the short term over the long term, impulse over patience. . . the No. 1 cause of both the crisis and the subpar recovery we are in: a stubborn refusal to deal head-on with past-due and underwater mortgages." Bair offers her prescription in Bull by the Horns and also discusses many of the commonly argued causes for instance, "GSEs played a major role not by directly buying and guaranteeing subprime mortgages but after the fact, by gobbling up the senior-tranche securities packaged and sold by Wall Street investment houses. Though greed was a primary motivation for the subprime craze, the government played a role by giving favorable capital and accounting treatment to banks that securitized their loans and also by giving the GSEs credit toward their affordable housing goals."
- Dr. Michael Burry is featured in Michael Lewis's The Big Short and this Chapter in Vanity Fair is online. The ScionCapital web site (november 2011) included the following commentary ... "Dr. Burry repeatedly wrote that he had no faith that the SEC, the Federal Reserve, or any other branch of government, least of all Congress, would act to keep the housing bubble from expanding. In fact, Dr. Burry felt the government was absolutely complicit in enabling the housing bubble." Watch his 4/5/2011 presentation at Vanderbilt video for more on his thoughts and his prescriptions.
- Robert Shiller in The Financial Fire Next Time (1/14/2014) wrote "If we have learned anything since the global financial crisis peaked in 2008, it is that preventing another one is a tougher job than most people anticipated ... The financial crisis, which is still ongoing, resulted largely from the boom and bust in home prices that preceded it for several years (home prices peaked in the United States in 2006). During the pre-crisis boom, homebuyers were encouraged to borrow heavily to finance undiversified investments in a single home, while governments provided guarantees to mortgage investors. In the US, this occurred through implicit guarantees of assets held by the Federal Housing Administration (FHA) and the mortgage agencies Fannie Mae and Freddie Mac." Shiller and George Akerlof wrote in Animal Spirits "The crisis was not foreseen, and is still not fully understood by the public, and also by many key decision makers, because there have been no principles in conventional economic theories regarding animal spirits. Conventional economic theories exclude the changing thought patterns and modes of doing business that bring on a crisis. They even exclude the loss of trust and confidence. They exclude the sense of fairness that inhibits the wage and price flexibility that could possibly stabilize an economy. They exclude the role of corruption and the sale of bad products in booms, and the role of stories that interpret the economy. All of these exclusions from conventional explanations of how the economy behaves were responsible for the suspension of disbelief that led up to the current crisis. They are also responsible for our current failure in knowing how to deal with the crisis now that it has come."
- Nouriel Roubini wrote "It is widely agreed that a series of collapsing housing-market bubbles triggered the global financial crisis of 2008-2009, along with the severe recession that followed. While the United States is the best-known case, a combination of lax regulation and supervision of banks and low policy interest rates fueled similar bubbles in the United Kingdom, Spain, Ireland, Iceland, and Dubai.
- Peter Schiff argues that the crisis was caused by bad monetary, fiscal, and regulatory policy, with the Federal Reserve (which brought interest rates down) being the biggest culprit. See his debate with Richard Carnell titled What Exactly Caused the Financial Debacle? (short version)
- Ron Paul made his views clear in Blame the Fed for the Financial Crisis (10/20/2011) in the WSJ.
- Joseph Stiglitz suggested the global financial crisis was due, at least in part, to the war in The true cost of the Iraq war: $3 trillion and beyond (9/5/2010) in the Washington Post.
- Paul Krugman (and Robin Wells) in The Occupy Handbook (or via Salon) wrote "It’s clear that the financial crisis of 2008 was made possible in part by the systematic way in which financial regulation had been dismantled over the previous three decades ... In summary, then, the role of rising inequality in creating the economic crisis of 2008 is debatable; it probably did play an important role, if nothing else than by encouraging the financial deregulation that set the stage for crisis."
- James Grant (per The Occupy Handbook ) believes that "the root cause of so many of our problems is statism." Echoing Friedrich Hayek (1899-1992), he believes that the confrontation with "more and more legalisms and interventions" drains people and leads toward lethargy and withdrawal--as he puts it, "an endless low-level flu." The United States has, like Japan, made a serious policy mistake in subsidizing housing and mortgages to a tremendoes extent, and he suggests that much of our political activity since then has been focused on "postponing the repricing and recognition of this great mistake." Grant suggested that our recent financial crisis was caused by the free market working around unnatural government interventions; the primary culprit, in his view, was the chinese policy of recycling export earnings into U.S. dollar assets in an attempt to maintain the renminbi at an artificially low level.
Crisis Book Authors
2012 Candidates for President
- Henry Paulson (as reported by Andrew Ross Sorkin in Five Years After TARP, Misgivings on Bonuses in the NYTimes) said "I believe that the root cause of every financial crisis, the root cause, is flawed government policies."
- Tim Geithner summarizes his crisis opinions in Stress Test - "The fundamental causes of this crisis were familiar and straightforward. It began with a mania--the widespread belief that devastating financial crisis were a thing of the past, that future recessions would be mild, that gravity defying home prices would never crash to earth. This was the optimism of the great moderation, the delusion of indefinite stability. This mania of overconfidence fueled an explosion of credit in the economy and leverage in the financial system. And much of that leverage was financed by uninsured short-term liabilities than could run at any time. This combination of a long rise in borrowing fueled by leverage in runnable form is the foundation of all financial crisis, and it would have been dangerous in any financial system. But it was much more dangerous for us, because many of the overleveraged major firms that were borrowing short and lending long were outside our traditional banking system. These institutions were not constrained by the regulatory safeguards that applied to banks, which was why so much risk migrated in their direction, and they did not have access to the government safety net designed to contain runs on banks. The safeguards for traditional banks weren't tough enough, either, but what made our storm into the perfect storm was nonbanks behaving like banks without bank supervision and bank protections, leaving by some measures more than half the nation's financial activity vulnerable to a run. When the panic hit, and the run gained momentum, we did not have the ability to protect the economy until conditions were scary enough to provoke actions by congress . . . the root causes, as usual, were mania, leverage, and runable short-term financing. That's how our financial system became that scene from It's a Wonderful Life . . . the most powerful theory of the crisis was simple. It started with a long mania of overconfidence, the widespread belief that house prices would not fall, that recessions would be mild, that markets would remain liquid. The mania fueled too much borrowing, too much leverage, and too much runnable short-term financing, with too much of it happening outside the traditional banking system. Borrowers took too many risks; creditors and investors were way too willing to finance those risks; the government failed to rein in those risks, and then was unable to act quickly and forcefully enough when the panic hit. Meanwhile, the actions the government finally took to end the crisis created new dangers of moral hazard. And our Wild West system of consumer protection was a national disgrace."
- Alan Greenspan wrote in The Crisis (Spring 2010) "it was the heavy securitization of the U.S. subprime mortgage market from 2003 to 2006 that spawned the toxic assets that triggered the disruptive collapse of the global bubble in 2007–08."
- Adair Turner writes in The Failure of Free-Market Finance that "Five years after the collapse of the US investment bank Lehman Brothers, the world has still not addressed the fundamental cause of the subsequent financial crisis – an excess of debt... If we do not address the fundamental fact that free financial markets can generate harmful levels of private-sector leverage, we will not have learned the most important lesson of the 2008 crisis." Previously, in a speech at South African Reserve Bank (11/2/2012) he wrote "The crisis of 2008 was essentially a crisis of excessive leverage, the result of a steady build up of excessive debt contracts over several preceding decades. That excessive leverage led to bust. And after the bust, deleveraging creates deflationary pressures which we cannot offset by conventional monetary policy alone, since interest rates are at the zero bound."
- Alan Blinder writes "Years of disgraceful financial shenanigans in the 2000s, some illegal but many just immoral, brought on the Great Recession with virtually no help from any co-conspirators." (Five Years Later, Financial Lessons Not Learned in the WSJ (9/11/2013)
- Carmen Reinhart and Kenneth Rogoff discussed crisis causes in Top Culprit in the Financial Crisis: Human Nature in Barrons (11/24/2012). Reinhart stated "this is so grounded in human nature, I'm extremely skeptical that we will overcome financial crises in any definitive way" while Rogoff stated "It is almost as if these institutions and these legal systems [in Asia, Europe, the U. S.] were forms of clothing and makeup, but inside the person is the same." More recently, Reinhart was quoted in the NYTimes “This crisis may in the end surpass in severity the Great Depression in a large number of countries.” Rogoff also summarizes in Innovation Crisis or Financial Crisis? "the main cause of the recent recession is surely a global credit boom and its subsequent meltdown."
- Michael Lewis (author of The Big Short, which has sold more than a million copies, as well as Boomerang, and Liar’s Poker) wrote "the idea that the story begins and ends with government policy is insane. Wall Street, all by itself, orchestrated the crisis by a web of deceit that was breathtaking...Incentives are at the bottom of it all" in Michael Lewis on the Next Crisis and previously in an interview (with himself) (from The Occupy Handbook) Lewis wrote "The chief cause of the financial crisis was what the government didn’t do (regulate) rather than what it did (subsidize homeownership)."
- Andrew Ross Sorkin (in Too Big To Fail) wrote "The seeds of disaster had been planted years earlier with such measures as: the deregulation of the banks in the late 1990s; the push to increase home ownership, which encouraged lax mortgage standards; historically low interest rates, which created a liquidity bubble; and the system of Wall Street compensation that rewarded short-term risk taking. They all came together to create the pefect storm. By the time the first signs of the credit crisis surfaced, it was probably already too late to prevent a crash, for by then a massive correction was inevitable. Still, it is reasonable to ask whether steps could have been taken even at this late stage to minimize the damage."
- David Wessel wrote in In Fed We Trust "The causes of the Great Panic are many, the list of culprits long. Ultimately, every check of the system failed to restrain the excess and greed or to correct for the myopia and delusional optimism. Blame the well-paid executives and directors of the nation's financial institutions ... Blame the bankers ... Blame the credit reporting agencies ... Blame the chain of subprime mortgage makers ... Blame the supposedly sophisticated investors ... Blame the home buyers ... Blame the politicians ... Blame the regulators ... Blame the reporters Blame the Federal Researve ... And, yes, blame Alan Greenspan ..."
- Gary Gorton discusses crisis causes and prescriptions in “Misunderstanding Financial Crises”, a Q&A with Gary Gorton in the FT(10/25/2012). He disagrees with the greed and fraud arguments - "explanation of the recurrence of systemic financial crises throughout the history of market economies cannot be explained by greed or fraud, etc. These are not explanations of crises and they are not the central problem. We are talking about systemic crises: that is crises in which the entire financial system is at risk." He focuses on bank runs - "A bank run is a demand that all short-term debt in the banking system be turned into cash. That is simply not possible. It would be best to create a system where such a demand does not arise because the government’s oversight has created sufficient confidence."
- William Cohan's sub-headline for his article How We Got the Crash Wrong in the Atlantic is "Leverage was not the problem—incentives were, and still are."
- Roger Lowenstein summarized some of the regulatory problems that caused the crisis in Banking Fix Made Easy With Six Simple Steps (11/16/2009)
- Charles Calomiris and Stephen Haber write in Fragile By Design "the subprime crisis of 2007-2009 was the outcome of a series of spectacular political deals that distorted the incentives of both bankers and debtors ... severe bank-insolvency crisis require a combination of imprudent lending and inadequate bank capital to back high-risk loans ... the devil is in the details, but one cannot escape the conclusion that the decisions made by regulatory agencies were driven by the logic of politics."
- In Washington’s Financial Disaster (1/29/2011), regarding the FCIC report, Frank Partnoy concluded that "Congress should try again." In What’s Inside America’s Banks? Partnoy and Jesse Eisinger (1/2/2013) wrote "The financial crisis had many causes—too much borrowing, foolish investments, misguided regulation—but at its core, the panic resulted from a lack of transparency. In Did Fannie Cause the Disaster? (10/27/11) Partnoy and Jeff Madrick review Gretchen Morgenson and Joshua Rosner's Reckless Endangerment and they conclude "Contrary to many commentators on Reckless Endangerment, and to its chief claims, it was Wall Street, not the GSEs, that fundamentally caused the 2007–2008 crisis." Christopher Whalen has a Letter to Editor (11/16/2011) on his web site in response. He summarizes "the housing GSEs and the Wall Street banks are one and the same. Arguing about which did more harm is a frivolous waste of time by some very smart people."
- Andrew Smithers writes in The Road to Recovery: How and Why Economic Policy Must Change "I aim to convince the reader that the financial crisis, the great recession which it produced and the failure to generate a strong recovery are all the results of policy errors in the management of the economy..."
- Barry Ritholtz's Who is to Blame, 1-25 (6/29/2009) in Bailout Nation
- Nassim Nicholas Taleb - Why Did the Crisis of 2008 Happen? (8/26/2010)
- Martin Wolf, author of Fixing Global Finance (Forum on Constructive Capitalism) writes in The Occupy Handbook "we need to emphasize the role of the government and its agencies, including central banks. These acted as stabilizing forces during the crisis. Indeed, they needed to do even more than they did. But they also acted as destabilizing forces before the crisis: in particular, central banks were too aggressive in preventing moderate recessions, thereby exacerbating the willingness to take risks, and governments were too willing to encourage excessive leverage in the household sector, to promote the dream of universal homeownership."
- Joe Biden in the Vice Presidential debate said "And, by the way, they talk about this Great Recession if it fell out of the sky, like, “Oh, my goodness, where did it come from?” It came from this man voting to put two wars on a credit card, to at the same time put a prescription drug benefit on the credit card, a trillion-dollar tax cut for the very wealthy. I was there. I voted against them. I said, no, we can’t afford that."
- David J. Lynch (12/21/2011) summarizes the apparent positions of Obama, Romney, and Gingrich in this Bloomberg article, and Peter Ferrara comments further (1/8/2012)
- Mitt Romney (11/9 debate) “The federal government came in with Fannie Mae (FNMA) and Freddie Mac, and Barney Frank and Chris Dodd told banks they had to give loans to people who couldn’t afford to pay them back.” Plus, Andrea Saul, a spokeswoman for Romney, e-mailed several comments the candidate has made on the crisis, including a passage in his 2010 book “No Apology” that says responsibility for the 2008 panic shouldn’t “be laid solely at the feet of Wall Street and the private sector.”
- Newt Gingrich has suggested jailing Frank, the former chairman of the House Financial Services Committee, and Dodd, who headed the Senate Banking Committee until his retirement this year.
- "President Barack Obama cited Wall Street misdeeds last year in signing the most comprehensive new financial regulations in more than 75 years."
- In a Gallup Poll released on Dec. 12, 64 percent of respondents said “big government” is the main threat to the country, compared with 26 percent who said “big business.”
- Ryan Chittum gives his take on the republican candidates (12/21/2011)
- Independent candidate Laurence Kotlikoff (and author of Jimmy Stewart Is Dead: Ending the World's Ongoing Financial Plague) summarized his Prescriptions to Heal Economy (9/27/2011) and How to Fix Mortgage Mess (1/13/2011) at Bloomberg.
- Jack Bogle suggests that mutual fund companies "played a starring role in the financial crisis" in 10 things mutual fund companies won’t say from Marketwatch (3/2/2013)
- Eugene Fama said "I think the global crisis was first a problem of political pressure to encourage the financing of subprime mortgages. Then, a huge recession came along and the house of cards came tumbling down" in An Experienced View on Markets and Investing via the Financial Analysts Journal (5/6/2012). In response to the question "What would your suggestion be for monetary or fiscal policy at this point?" Fama responds "Simple. Balance the budget."
- Burton Malkiel in an interview stated "I think there are misaligned incentives that are a problem, but not deregulation. To be sure, the Glass-Steagall repeal was not a great idea. I think the too big to fail problem is worse now than before the crisis, but it was not Glass-Steagall that caused the crisis ... I think, again, it was poor regulation. We had people looking at bank capital. And yup, the SEC and the Federal Reserve, they did screw up, absolutely, by allowing that kind of leverage to exist. Although I don’t think 1,000 pages of Dodd-Frank is the answer."
- Michael Bloomberg said Blame Congress, not Wall Street (11/1/2011) - Ritholtz comments in the WP on 11/5/2011 and 11/19/11
- Clifford Asness wrote "The war continues over whether the 2007-08 financial crisis was caused by governent or by the big banks ... When any bubble bursts ... and a global financial meltdown follows, nearly everyone shares some blame. You can't get a good bubble off the ground without governent, the financial industry (including not just bankers, who are often the named party, but the whole real estate industry, the entire mortgage finance industry, rating agencies, and others), and regular individuals (nobody wants to lay any blame on Main Street; where is the political hay in that?) acting stupid and short sighted (e.g. quitting real jobs to flip houses) ... the typical narratives and debates conflate two events. We had (1) a real estate/credit bubble in prices that, upon bursting, precipitated (2) a massive financial crisis. The collapse of the real estate/credit bubble did not have to lead directly to a financial crisis. See the tech bubble's deflation for a counterexample. The question of who should shoulder what share of the blame for the real estate bubble and who should shoulder the blame for the financial crisis do not necessarily lead to the same answer..."
- Mortimer Zuckerman in Who to Blame for the Financial Crisis from USNews (1/29/2010)
- James Gorman (Morgan Stanley CEO) in a speech in Florida in 2010, soon after taking over as CEO (Source) - “What caused the financial crisis?” the CEO asked. “Illiquid assets, funded short-term, held by overleveraged institutions that were inadequately capitalized.”
- Felix Salmon writes in The Occupy Handbook that "There's a lot of blame to go around when it comes to the causes of the financial crisis, but at heart, it was about debt--or, as the financial markets like to call it, leverage. Investment banks created highly leveraged mortgage-backed securities that blew-up; commercial banks backed up their holdings of super-senior debt instruments with little or no capital; homeowners bought houses with no money down, paying for them by borrowing amounts they could never afford to repay. In many ways, the debt-fueled housing bubble was the financialization of America carried to its logical conclusion."
- The Economist had two crisis cause articles on 9/7/2013
- The origins of the financial crisis "it is clear the crisis had multiple causes. The most obvious is the financiers themselves ... Central bankers and other regulators also bear blame ... The macroeconomic backdrop was important, too. The “Great Moderation”—years of low inflation and stable growth—fostered complacency and risk-taking. A “savings glut” in Asia pushed down global interest rates. Some research also implicates European banks, which borrowed greedily in American money markets before the crisis and used the funds to buy dodgy securities. All these factors came together to foster a surge of debt in what seemed to have become a less risky world."
- Where’s the next Lehman? "The disaster of September 2008 had many causes ... Lehman’s demise spawned catastrophe because it combined three separate vulnerabilities. The underlying one was a surge in debt, particularly in the financial sector, brought on by a housing bubble. The ensuing bust was made more dangerous because of the second weakness: the complex interconnections of securitised finance meant that no one understood what assets were worth or who owed what. Lehman’s failure added a third devastating dimension: confusion about whether governments could, or would, step in as finance failed.
- FactCheck.org (Joe Miller and Brooks Jackson) in Who Caused the Economic Crisis? (10/1/2008)
Compiled by Gary Karz, CFA
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