The Final Report of the Financial Crisis Inquiry Commission (the Commission) was released on January 27, 2011. The Report is a bestseller according to the New York Times, but it does not draw clear conclusions about what caused the housing and financial market meltdowns of 2008.
The Commission was called for in the Fraud Enforcement and Recovery Act, which became law in May 2009. The ten Commission members, all private citizens with relevant financial market expertise, were selected by Congressional party leadership. Six were invited to serve by the Democrats, and 4 by the Republicans. The Commission began its work in September 2009.
As the December 2010 reporting deadline neared, it became clear that the Committee members were not getting along with one another very well, and that the discord was partisan.
The Final Report was not delivered by the deadline. Instead, the Committee members appear to have spent their time attempting to reign in those with whom they did not agree. The Republican appointees called a vote to ban the words “shadow banking” “Wall Street” “interconnected” and “deregulation” from the majority report. They lost that vote. Ultimately, the partisan disagreements among Committee members were sufficiently serious to result in the inclusion of dissenting reports in the final document. As noted in one of the two dissents, the Democratic appointed majority approved a limit of 9 pages per signatory on their report.
The Committee’s 400-plus page report takes its readers on a page-turning tour of major U.S. financial market events from the crash of 1929 and earlier, but with a focus on the period from about 2000 to the present day. Its authors conclude that the financial crisis was caused by government failures in financial regulation and supervision, and corporate failures of governance and risk management. It is arguable that the Commission’s most controversial conclusion is that “this financial crisis was avoidable”. Certainly their most chilling observation is that nothing that has been done since late 2008 would necessarily stop it from all happening again.
A dissent written by three of the four Republican appointees takes issue with the identification a lack of domestic market regulations and regulators willing to enforce them as key causes of the crisis. They note that major contributors – the credit bubble, the housing bubble and financial firm failure resulting from risk mismanagement – occurred in Europe as well as in the U.S. They conclude that failures in U.S. market regulation could not be the cause of the crisis, which was in essence, brought about by multinational managerial failure.
At the other extreme, a second dissent penned by the fourth Republican appointee to the Committee blames the financial crisis on just one very domestic factor: U.S. government housing policy.
Perhaps it was overly optimistic to expect that the Commission would provide a firm and unanimous answer to the question “what caused the financial crisis of 2008?”, and it is unlikely that even a meeting of the Commissioners’ minds would have ended the debate.