On: The FCIC

This much is clear: Despite the flurry of topics which too-often steal our attention, November’s outcome lies predominately with the economy.  That known, this much is opaque: By what criteria will the electorate make their judgment? Conventional wisdom holds that Americans, with one eye on unemployment and another on their pocketbooks, will ponder Ronald Reagan’s hopelessly ill-nuanced and misleading question, Am I better off today than I was four years ago? This is a fiction.

American’s won’t judge President Obama on that proposal alone. They’ll also ask other, equally pertinent questions such as: “how bad was the financial crisis,” “what would Mitt Romney have done,” and “how much accountability can we realistically ascribe to the president?”

Before parsing these questions unaided, readers should download a free copy of the Financial Crisis InquiryCommission’s (FCIC’s) report on the economic meltdown – it is an unparalleled guide through the convoluted and complicated world in which these quandaries exist. At 622 pages (the approximate length of the sixth Harry Potter novel, yet with denser material), it is a nigh-comprehensive analysis of the financial crisis, and an oasis of clarity in a society burdened with conflicting information.

After reviewing millions of documents, interviewing 700 witnesses and sitting through 19 days of public hearings, what has resulted is a compendious document which confirms much of what we already knew – and disabuses us still more.

Wish to compare President Obama to President Reagan? Don’t bother; our current system “bears little resemblance to that of our parents’ generation.” The markets are vastly more complicated, technology has added both breadth and depth to financial instruments and the financial sector’s preeminence in our economy has grown steadily. In 2007, the sector contributed 27 percent of all corporate profits. In Reagan’s era, it was just 15.

But the report’s most valuable contribution is this: it refutes the claim (most often peddled by conservatives) that the downturn was a typically disastrous ramification of a naïve and distended government. Learn, dear reader, about the 1977 Community Reinvestment Act (CRA), a bête noire of many conservatives, who wrongly attribute America’s failings to programs like these. Said the authors of Reckless Endangerment, one of the many nonfiction books attempting to make sense of the financial crisis: The CRA is “a story of what happens when Washington decides, in its infinite wisdom, that every living, breathing citizen should own a home.”

This view is wrong for two reasons. First, the CRA was written to prohibit “redlining,” a practice in which banks deny credit to entities because of the neighborhoods in which they exist, and give no thought to their creditworthiness.

Contrary to conservative belief, we on the left prefer to immanentize the eschaton in more minute ways than giving “every living, breathing citizen” a home.

Second, in their report, the commission wrote in unequivocal and convincing language that “the CRA was not a significant factor in subprime lending or the crisis. Many subprime lenders were not subject to the CRA. Research indicates only 6% of high-cost loans—a proxy for subprime loans—had any connection to the law. Loans made by CRA-regulated lenders in the neighborhoods in which they were required to lend were half as likely to default as similar loans made in the same neighborhoods by independent mortgage originators not subject to the law.”

Nearly every time the report does mention our government’s relation to the market, however, it refers to “more than 30 years of deregulation.”

Such derelictions set the stage for 2007, in which the five major investment banks had $40 of assets for every one dollar of equity. If the value of their assets fell by only three percent, the report tells, these firms would be in ruins.

Household debt ballooned as well, rising 63 percent from 2001 to 2007; nearly a tenth of all mortgage borrowers used “option Adjustable Rate Mortgages” - loans in which borrowers could “make payments so low that their mortgage balances rose every month.” When the economy collapsed, much like the banks, there was little if any cushion on which these borrowers could fall.

J.K. Galbraith

The coming election
“Economic forecasting,” said J.K. Galbraith, exists “to make astrology look respectable.” Quite right, which is why this writer will spare the reader the pain of enduring predictions on how the economy will look in slightly more than five months. But the FCIC makes use of proverbially 20-20 hindsight. Its revelations shouldn’t be put aside.

During 2007 and 2008, the fundamentals of the American economy simply stopped working. The FCIC report tells us what we did wrong, what we did right, and what can be done to ensure this doesn’t happen again.

Undecided voters should take note before revisiting the economy.