What Were the Causes the Financial Crisis?

Sources:
WSJ: Head of Crisis-Panel Says Warning Signs Weren't Heeded
Financial Times: US crisis inquiry points to widespread failures
NPR: The Crisis Reports: A Literary Analysis
PBS: Financial Crisis Commission Divided Over Causes, Culprits Behind Meltdown

The Financial Crisis Inquiry Commission (FCIC), comprised of six Democrat-appointed members and four Republican-appointed members, was established in May 2009 and tasked with investigating the causes of the 2008 financial crisis. Last month it released its final report on the causes of the financial crisis, concluding that the financial crisis was “avoidable.” This report, adopted by six Democratic commissioners, said regulation failures, corporate governance problems, excessive borrowings and “systemic breaches” in ethics all had led to the financial crisis. The chairman of the FCIC, Phil Angelides, emphasized that the crisis was “a result of human action, inaction, and misjudgments.” For example, he said the Federal Reserve missed several opportunities to prevent the financial crisis by not properly regulating practices such as predatory lending and derivatives investment.

However, four Republican commissioners disagreed with the majority’s conclusion and wrote two dissenting reports. Three of the commissioners focused on larger forces such as global credit and housing bubbles, saying that the crisis was not avoidable. “It’s too simple to say in hindsight that if people would have just behaved differently, this crisis wouldn't have happened,” said Keith Hennessey, one of the three Republican commissioners. The dissenters also criticized the majority’s report for listing too many causes—their report focused on ten causes including credit and housing bubbles, “nontraditional mortgages,” “failures in credit-rating and securitization” transforming “bad mortgages into toxic financial assets,” financial institutions taking massive housing risk and holding too little capital, and “financial shock and panic.”

Another dissenting report was prepared by Peter Wallison, a fellow at the American Enterprise Institute. According to his report, the main contributor to the crisis was the government’s housing policy of facilitating housing for low-income earners through the government-sponsored mortgage enterprises, Fannie Mae and Freddie Mac.

The FCIC’s report is the first official report released by the U.S. Government. Mr. Angelides said that the report could be a “guidepost to policymakers and the public,” especially for lawmakers implementing the Dodd-Frank financial reform bill that was passed in July 2010.

Discussion: Among the three reports, which report do you think best explains the causes of the financial crisis? (Full reports are available at http://www.fcic.gov/.)