Law enforcers normally use the witness protection programme to shield people willing to provide testimony. So far, the US Financial Crisis Inquiry Commission seems determined to protect a political class willing to do almost anything to avoid testifying.
That’s the message of the commission’s first week of hearings, which focused on repeating Washington’s pet theory of what caused the credit mania and subsequent panic. To wit, the greedy bankers did it, abetted by Bush administration deregulators and perhaps, a little by the Clinton treasury when it agreed to repeal the Glass-Steagall Act. If the commission is merely going to reinforce this laughably narrow and politicized view, this is going to be a waste of money and time.
Created by the US Congress and due to report by 15 December, the commission is chaired by Phil Angelides, a former chairman of California’s Democratic Party. His first group of witnesses last Wednesday were the CEOs of Bank of America, Goldman Sachs and JPMorgan Chase, plus the chairman of Morgan Stanley.
Angelides delivered what you would expect of a political hearing, accusing Goldman of “selling a used car with faulty brakes” when it sold mortgage-backed securities. He demanded that the executives accept blame for the crisis and then said he “was troubled by the inability to take responsibility.” On day one, Angelides appeared to have reached his conclusion.
Our point isn’t that bankers didn’t make stupendous blunders. It is that the roots of the mania and panic are so much larger than any single financial security, compensation practice or regulation.
Start with the US Federal Reserve, which for years kept interest rates below the rate of inflation and thus created a global subsidy for credit. Bankers and investors had an incentive to sell and take on more debt. A Wall Street Journal survey of economists last week found that a majority now think Fed policy was a major culprit.
If the commissioners are looking for historical guidance, they might consult the late Charles Kindleberger’s classic Manias, Panics, and Crashes: A History of Financial Crises. On page 10 of the fifth edition paperback, the good professor declares: “The thesis of this book is that the cycle of manias and panics results from the pro-cyclical changes in the supply of credit.”
Also missing this week was anyone from Fannie Mae and Freddie Mac, the mortgage giants that turbocharged the housing boom. With their implicit taxpayer backing, Fannie and Freddie held or guaranteed more subprime and Alt-A loans than anyone—much more than the combined holdings of the four bankers represented this week.
So long as Fannie and Freddie kept increasing mortgages to low-income borrowers, the dynamic duo’s political protectors kept fighting off efforts to cap the size of Fannie and Freddie’s mortgage portfolios. The pair would ultimately hold or guarantee mortgages amounting to at least $5 trillion. That sum is greater than the annual output of Japan and, yes, a whole lot bigger than the balance sheet of Goldman Sachs. A serious inquiry will examine the business practices of Fannie and Freddie, the long battle to rein them in, and the US Congress members who blocked reform.
The greatest oddity of the commission may be that its report is set to arrive after Congress and the Obama administration hope to pass the most far-reaching reform of US financial laws since the 1930s. So prescription first, diagnosis later.
THE WALL STREET JOURNAL
Edited excerpts. Comment at firstname.lastname@example.org