The Financial Crisis Inquiry Commission that was established in May 2009 as part of the Fraud and Recovery Act released its report that examined the domestic and global causes of the financial crisis. The report states that the financial crisis could have been avoided and names the Clinton and Bush Administration, the Treasury Secretary, as well as the current and former Federal Reserve Board as having been partially responsible by having failed to act appropriately to prevent the financial disaster from happening.

WTF Finance doesn’t disagree with the panel that the above named individuals and entities are to blame but we strongly disagree with the conclusion that lack of regulation lead to the financial demise. It wasn’t their lack of actions but their market interferences through Government and Fed policy that allowed the credit bubble to reach those proportions.

The 632 page document blames lack of oversight and regulation:

“The prime example is the Federal Reserve’s pivotal failure to stem the low of toxic mortgages, which it could have done by setting prudent mortgage-lending standards…More than 30 years of deregulation and reliance on self-regulation by inancial institutions, championed by former Federal Reserve chairman Alan Greenspan and others, supported by successive administrations and Congresses, and actively pushed by the powerful inancial industry at every turn, had ​stripped away​ key safeguards, which could have helped avoid catastrophe.”

It wasn’t a free market that caused malinvestment but lose monetary policy by the Federal Reserve Policy and Government Guarantees of non-sense loans that fueled price increases and the associated speculation. If the banks knew they were accountable for the loans they were writing they would have been more careful on who to qualify, but big anti-free market Government policies that run on the premise that homeownership is an American right, not a priveledge, distored the markets as the Government indirectly guaranteed nearly 5 Trillion Dollars of mortgages. 

The report blames the Federal Reserve for not regulating the quality of mortgages that were written but the panel fails to understand that a free market would have allowed for self-regulation. The panel wrongfully blames 30 years of deregulation as a root to the problem when the United States driften furhter away from a free-market system during that period.

It’s interesting but not surprising that those entities whose anti-free market policies are responsible for building the foundation for the credit and real estate bubble are still in charge of solving the problem and they are doing so with the same policies that got us here. The Federal Reserve is still operating on the inflationary policy of adding excessive liquidity to the markets in an attempt to re-inflate the bubble while the Federal Government still guarantees non-sense home loans through its various agencies.

It wasn’t lack of regulation but interference through loan guarantees by agencies such as Fannie Mae, Freddie Mac, VA, and the USDA that still guarantees 100% home loans in rural areas. WTF Finance highlighted in our article “Inside the Bubble Economy” how those in charge of these programs acknowledge the problems while continueing writing more loans to re-inflate the bubble and continue policy as usual.

“Nearly one-quarter of all mortgages made in the first half of 2005 were interest only loans. During the same year, 68% of “option ARM” loans originated by Countrywide and Washington Mutual had low- or no-documentation requirements.”

Instead of focusing on the malinvestment variables that led to the excessive speculation one should focus on the policies that created the environment in which malinvestment was encouraged. Had it not been for Government subsidized home purchase and refinance loans home prices would have never appreciated the way they did. In an attempt to prolong the housing market’s appreciation and delay the inevitable downturn Congress voted on numerous occasions to increase the FHA loan limit which allowed more people to take on a greater amount of debt and resulted in further increases of home values.

The Panel of the Financial Crisis Inquiry Commission can point fingers at creative loan financing all they want but the reality is that without excessive credit in circulation banks would have been more conservative with their borrowed capital. It’s Federal Reserve policy to manipulate interest rates and herein lies the problem as the rates do not reflect the true cost of what credit should be. Manipulating the interst rates to artificial low values can also lead to malinvestments, dependence on unsustainable overconsumption, and provide a wrong sense about the economic state of the Economy. In a non-regulated free market system interest rates would rise in the event that the overall savings rate is low. This is simple supply and demand economics. In times of low savings money supply is low and the cost to borrow that capital should increase. It’s the manipulation of credit conditions that is at the root of financial bubbles.