The Financial Crisis Inquiry Commission’s report couldn’t come at a better time. At a moment when it seems that Washington would rather forget what happened two years ago, it documents the opportunism, bad judgment, and criminality that crashed the world’s economy once – and could again at any time. An interconnected web of Wall Street criminality, discredited ideology, and politicians chasing big money – along with a surprising amount of executive incompetence – has caused continued suffering for millions. At a time when the nation’s capital is convinced that CEOs need appeasing rather than policing, the FCIC report is a badly needed return to reality.
Wall Street executives weren’t mentioned in the State of the Union or the Republican response. But their actions caused this crisis, and they can’t be ignored politely like tipsy uncles at a family wedding. The only way to prevent the next crisis is by understanding the last one – and then taking the right actions.
There was a lot of talk on Tuesday night about the need for jobs, but very little about why we need them. The President lamented the fact that “there are at least five different entities that deal with housing policy.” But he didn’t point out that the housing market was undone by too little regulation, not too much – leaving one mortgage in five underwater, 3.4 million homes in foreclosure, and a generation’s wealth wiped out in a few short months. And the Republicans sang the money-saving virtue of “less government” – even though we’ve learned that a government which spends less on regulation is the most expensive government of all.
As the New York Times reported, the FCIC report will conclude that “the 2008 financial crisis was an ‘avoidable’ disaster caused by widespread failures in government regulation, corporate mismanagement and heedless risk-taking by Wall Street.” It will document banker misdeeds that range from irresponsibility and mismanagement to corruption and criminality. It’s been reported that the Commission will also refer a number of cases to the authorities for possible prosecution.
This report has had a long and sometimes challenging history. But to paraphrase an old gospel song, it “may not be here when you want it, but it’s right on time.”
Over three decades, our government was captured by a libertarian-inspired economic philosophy that had previously been considered radical and impractical – correctly so, as it turns out. That philosophy’s most prominent spokesman, former Ayn Rand acolyte Alan Greenspan, was celebrated as a “maestro,” until the house of cards he came to symbolized finally collapsed.
The prevailing economic myth, of an impossibly wise and genuinely free market, was as useful as it was Utopian. It provided ideological cover for the deregulation that both parties embraced. Government leaders were compromised by the lure of huge campaign contributions, and by a revolving door that ensured future wealth for cooperative politicians and regulators from both parties. The result enriched Wall Street and the Washington elite and left the rest of the country wounded.
The deregulation of the nineties allowed banks take to risks they couldn’t possibly survive. But they had been rescued in previous crises, and the cozy relationship between government and bankers assured them they’d be bailed out again. Freed from the consequences of their own actions, they gambled … and we lost.
Money for nothing
The most surprising thing about the FCIC hearings for me personally was the lack of competence shown by so many top bankers. The Wall Street executives I worked for were smart, demanding, and driven, but bankers like Citi’s Robert Rubin and Chuck Prince … not so much. Their FCIC testimony displayed a shaky grasp of their business and a lack of concern about the risks facing their own organizations. Many of them seemed to lack even the most basic level of intellectual curiosity. A big bank is a fascinating, complex entity, but one executive after another seemed to shrug off the details their own banks’ operations with bored indifference.
Sure, their testimony may have been expecially vague because of their understandable desire to avoid self-incrimination. But even allowing for that, the low level of managerial skill they displayed was disconcerting. Today’s generation of financial executives may be enjoying the greatest disparity between income and executive performance since indolent princes inherited vast kingdoms through the divine right of kings.
Yet despite this embarrassing record, these executives want to be pampered and flattered by Washington again – and they’re getting their wish. The President and his party took some steps toward genuine financial reform with last year’s bill, but a great deal of work is still needed and their recent appointments aren’t encouraging. Meanwhile, the Washington consensus is pressuring the Administration to assuage the “hurt feelings” of CEOs with some success, despite record profits that should provide more than adequate compensation for any injuries to their pride.
The President only mentioned financial reform in passing, in his comments about regulations:
“When we find rules that put an unnecessary burden on businesses, we will fix them. But I will not hesitate to create or enforce commonsense safeguards to protect the American people. That’s … why last year we put in place consumer protections against hidden fees and penalties by credit card companies, and new rules to prevent another financial crisis …”
Last year’s bill was a start, but more reform is urgently needed – to break up “too big to fail” banks, end runaway speculation, protect consumers, and end the incestuous relationship between banks and government. Prosecutions are needed, too. They’re the only way to ensure that bankers can’t violate laws with impunity, knowing that even if they’re caught their shareholders will pay the fines.
But if the President and his party need to focus their efforts, the Republicans already know what they want to accomplish: They’re committed to restoring the klepto-plutocracy that continues to plunder the economy. Their “rollback to 2008 spending levels” would conveniently eliminate funding for the urgently-needed provisions in last year’s financial reform law. It would effectively shut down the Consumer Financial Protection Bureau and hamper investigation and enforcement at several different agencies.
In the Republican response to the State of the Union, Rep. Paul Ryan said that “limited government also means effective government.” That statement has been roundly and repeatedly disproved – by Katrina, the BP spill, and, as the FCIC report will show, by the regulatory negligence that led to the Great Recession. Unfazed by reality, Rep. Ryan insisted that “limited government will unshackle our economy and create millions of new jobs.”
For her part, Rep. Michelle Bachmann spoke of “132 regulations put in place in the last two years, many of which will cost our economy $100 million or more.” But even if that were true – she offered no supporting evidence – that figure is dwarfed by the economic cost of a recession created by regulatory neglect and prolonged by an unwillingness to provide further stimulus.
“Limited Government” is the most expensive government of all
Here’s an estimate of the recession’s economic impact:
(via Paul Krugman)
The “limited government” approach to regulation cost us nearly three trillion dollars in lost prosperity.
Think of this graph as a glimpse of some happier alternate universe, where government did its job and the economy thrived as a result. Menzie Chenn, the economist who produced it, describes the recession as a “mindless deregulation and irresponsible fiscal policy induced-crisis” and warns that “certain forces seek to gut financial regulation by way of ‘defunding.'”
The “defunders” are back.
Remembering the past to improve the future
The Republican members of the FCIC staged a walkout last month by ginning up an artificial (and sometimes unintentionally surrealistic) controversy, and now we know why. The Commission’s report will be a comprehensive look at the failures of deregulation, the ongoing danger banks pose to the economy, and the misdeeds of past and present bank executives.
There are those who would argue that the Great Recession was unavoidable, but that’s not true. It could have been avoided with stronger regulations, the deterrent effect of criminal prosecutions, and wiser heads than Alan Greenspan and Ben Bernanke at the helm of the nation’s economy.
Memories are short in Washington, and this report will help us remember. It will take more than Tuesday’s polite silence to rein in Wall Street and protect America’s economic future. Hopefully this report will serve as a call to action.
This post was produced as part of the Curbing Wall Street project.