10:15am

Thu January 27, 2011
The Two-Way

'Human Action And Inaction' Caused 2008 Financial Crisis, Report Concludes

The Financial Crisis Inquiry Commission's report on the 2008 meltdown, which The New York Times previewed yesterday, is now online here and it does indeed conclude that the mess was avoidable and that those who should have known better failed at their jobs:

"The crisis was the result of human action and inaction, not of Mother Nature or computer models gone haywire. The captains of finance and the public stewards of our financial system ignored warnings and failed to question, understand, and manage evolving risks within a system essential to the well-being of the American public. Theirs was a big miss, not a stumble. While the business cycle cannot be repealed, a crisis of this magnitude need not have occurred. To paraphrase Shakespeare, the fault lies not in the stars, but in us."

The report adds that:

— "Widespread failures in financial regulation and supervision proved devastating to the stability of the nation's financial markets. The sentries were not at their posts, in no small part due to the widely accepted faith in the self-correcting nature of the markets and the ability of financial institutions to effectively police themselves."

— "Dramatic failures of corporate governance and risk management at many systemically important financial institutions were a key cause of this crisis. There was a view that instincts for self-preservation inside major financial firms would shield them from fatal risk-taking without the need for a steady regulatory hand, which, the firms argued, would stifle innovation. Too many of these institutions acted recklessly, taking on too much risk, with too little capital, and with too much dependence on short-term funding."

— "A combination of excessive borrowing, risky investments, and lackof transparency put the financial system on a collision course with crisis."

— "The government was ill prepared for the crisis, and its inconsistent response added to the uncertainty and panic in the financial markets."

— "There was a systemic breakdown in accountability and ethics."

Now, as NPR's Jacob Goldstein wrote yesterday, it's important to note that those are the conclusions of the six Democrats on the commission. The four Republicans have filed dissenting opinions (which you can also see at the link to the full report).

In one of those dissents, it's said that:

"The majority's approach to explaining the crisis ... is too broad. Not everything that went wrong during the financial crisis caused the crisis, and while some causes were essential, others had only a minor impact. Not every regulatory change related to housing or the financial system prior to the crisis was a cause. The majority's almost 550-page report is more an account of bad events than a focused explanation of what happened and why. When everything is important, nothing is."

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