Friday, January 28, 2011

The Blind Men & The Elephant—The Totally Bullshit FCIC Commission Report and Dissents, Which Put All Together Actually Reveal Something

The Financial Crisis Inquiry Commission came out with its report—and two dissents!

Wanna cop a feel?
Lots to read! Lots of bullshit to wade through! Lots of finger pointing! Lots of skewed analysis that justify a political agenda!


Actually, cynical glee is the only emotion that keeps major depression at bay: The FCIC was set up in May of 2009, with the goal of getting to the root causes of the Global Financial Crisis, and find what policies and which actors were responsible for the melt-down. In a very real sense, the FCIC was supposed to be the modern day version of the Pecora Commission—

—but it wasn’t. Not by a country mile.

The bipartisan Commission members cleaved along party lines: The six members of the Democratic majority wrote the report, the four Republican minority members wrote two separate dissents.

The official report of the Commission—the one written by the six Democrats—starts by saying that the financial meltdown of 2008 was avoidable—which is trivially true: Every man-made event is “avoidable”.

Then the report squarely blames the Federal Reserve for abdicating its regulatory responsibility—which is very true: The Fed under Greenspan made it practically a point of honor to leave all the financial markets alone, and let them “innovate” as they saw fit, without vetting whether the “innovations”—like credit default swaps, mortgage bonds, and so on—were dangerous or not. Warren Buffett famously called default swaps the “financial weapons of mass destruction”—before the crisis. So Greenspan should have known better.

Then the Commission report goes after the banksters—which is also accurate, as their greed and recklessness certainly contributed to the crisis. Certainly their mismanagement of risk—not to mention their completely opaque balance sheets—created the conditions for crisis.

But the Commission report blames the banksters on moral grounds—it says nothing about how bankers have no skin in the game, as it were. They are employees of a corporation, not partners in a concern. Consider private European banks, that never put themselves at the level of risk that American corporate banks did. The Commission report doesn’t seem to understand the idea of OPM, and how banksters were the ultimate players in that game.

As to the government, the only criticism leveled by the Commission report is after the fact: The “inconsistent response [of the Federal government] added to the uncertainty and panic of the markets”. This, of course, is a reference to the Bush administration’s salvaging of Bear Stearns, yet then letting Lehman Brothers—a much larger, more important firm—sink.

The sense that comes off the report from the Democratic majority is that the Federal government did nothing wrong—except when it was being run by Republicans, such as the Federal Reserve, and the Treasury during the Hank Paulson/George W. Bush administration. Then, of course, they fucked up royally.

So although the Commission report highlights true causes of the financial crisis, one cannot take it seriously: It is so politically skewed—and so unwilling to look at long term, Great Society, New Deal government policies that directly led to systemic problems in the financial markets—that it torpedoes its own credibility. 

At least the report can be taken semi-seriously: The first dissent, written by three of the Republican members—Keith Hennessey, Douglas Holtz-Eakin, and Bill Thomas—is the most incompetent and irresponsible of the three written statements released by the Commission. It’s more of a joke than a dissent.

The three dissenters portentously claim they have identified “Ten Essential Causes of the Financial Crisis”: But what they actually do is simply enumerate a series of symptoms of the crisis. As anyone knows, symptoms aren’t causes.

Their number one “Essential Cause” is that “Starting in the late 1990’s, China, other large developing countries, and the big oil-producing nations built up large capital surpluses. They loaned these savings to the United States and Europe, causing interest rates to fall.”

This of course is bullshit—and bullshit that everyone knows: Interest rates were low starting in 1992 because Easy Al—that is, Fed Chairman Alan Greenspan—kept them low, goosing along the American economy whenever it threatened to slow down. This directly led to “irrational exuberance”, and a series of bubbles during the 1990’s and 2000’s. The only bubble Chinese and foreign money blew was in Treasury bonds. The tech bubble, Internet 1.0 bubble, housing bubble? All the Fed.

The other “Essential Causes”—such as II. (Housing Bubble), III. (Non-Traditional Mortgages), etc.—are clearly results of Easy Al’s easy money policies, while still other “Essential Causes”—such as X. (Financial Crisis Causes Economic Crisis)—are essentially tautologies.

There is no causal framework to Hennessey’s et al. dissent. There is no argument. There is just a series of symptoms tossed off, but no clear idea of what happened—only that it was not caused by private enterprise or the free market. Ultimately, this dissent is full of sound and fury, signifying nothing. (There’s a lot of Shakespeare quoted in these three documents; I don’t want to feel left out.)

The other dissent, written by Peter Wallison, starts off on a promising note (aside from an unfortunate typo on the very fist page): It accurately points to the Federal government policy (via the Department of Housing and Urban Development (HUD)) of fomenting home ownership to as many Americans as possible, regardless of their credit-worthiness, as being a prime culprit in the Crisis. 

Wallison is dead right—and points to how both the Clinton and Dubya administrations are equally responsible for having fomented home-ownership to the point of helping to create a housing price bubble.

Wallison very accurately points to the huge sub-prime and Alt-A loans as being the Achilles’ Heel of the whole mortgage-loan/securitization contraption. He notes—accurately—that these sub-Prime mortgages were the ones that blew up Fannie Mae and Freddie Mac.

But then Wallison veers off into Stupido Territory: He completely dismisses all arguments that anything else caused the Global Financial Crisis. Low interest rates, foreign flows of funds, shadow banking, or lax regulation—according to Wallison, none of them had anything to do whatsoever with the Crisis. Wallison blames it all on the sub-prime/Alt-A borrowing (and presumably the borrowers themselves—and of course, fucking HUD).

In other words, it was all the Gubmint’s fault.

Worst of all, Wallison denies that mortgage securitization had anything to do with the crisis—which is like saying that an iceberg had nothing to do with the sinking of the Titanic. Wallison writes, “But securitization is only a means of financing. If securitization was a cause of the financial crisis, so was lending. Are we then to condemn lending?’—which is exatly what he did before: Wallison rightly condemned loans to mortgage borrowers who were not credit-worthy. Yet securitization? According to Wallison, Not guilty.

Wallison is so blinkered by his pro-business, pro-bank, anti-government stance that he cannot—or will not—connect the dots between Federal government fomenting of mortgage loans, Federal Reserve abdication of its regulatory responsibilities, and rampant, unregulated, foolhardy securitization that eventually ended in tears.

Because Wallison is so willfully blinkered, one has to take with a grain of salt his fascinating explanation of how slipshod and arrogantly the Democratic majority ran the Commission. Were Wallison more willing to assign blame to the private sector where that blame is due, he would be more believable in his criticisms of the handling of the Commission. As it is, one isn’t sure whether to believe him or not.

That’s why this whole thing is so depressing: The report and the Wallison dissent accurately identify all the major causes of the Global Financial Crisis. Much like Plato’s blind men, each feeling a different part of an elephant and coming to their own—inaccurate—conclusions. Yet combined, they form an accurate picture. 

But because of partisan point-scoring and sheer meanness, an important opportunity to settle on the official version of the crisis was thrown away. 

So because there is no consensus as to why the financial crisis happened, there will be no consensus as to how to repair the financial system so that it does not happen again. 

This will turn the financial system’s playing field into a politicized stage: Democratic administrations and Congresses will treat the financial markets one way, trying to fix the system according to their (partisan) lights, while Republican administrations and Congresses will try to fix the system according to their (also partisan) lights. 

Who will win in this seesawing? The banksters. 

Who will lose? Americans. 


  1. Imagine if, instead of assertion and dissents, these were framed as "perspectives", which after all are incredibly useful in understanding such elephants.

    We would then have something approaching a system of "loyal opposition", useful for approaching the truth and/or furthering the interests of the people.

    Unfortunately, as your conclusion indicates, the political opposition we are used to turns out, even if unintentionally (I'm not wearing my conspiratorial undies this afternoon), to be extremely loyal in effect - it's just that the loyalty isn't to the people or the truth.

  2. In spite of the evidence people refuse to see or accept what Ludwig von Mises understood 100 years ago. Under a fractional reserve system, the expansion of the supply of money and credit by the central bank or banking cartel causes interest rates to fall below the natural rate. This sends misleading signals to economic actors, causing them to misalocate capital by making investments that cannot profit given the actual pool of savings and consumption patterns that exist in society. The artificial expansion can only come to an end through a collapse of the fractional reserve pyramid or a complete destruction of the currency unit altogether.

    Matthew 15:13 Every plant that my heavenly Father has not planted will be pulled up by the roots. Leave them; they are blind guides. If a blind man leads a blind man, both will fall into a pit.

  3. Mortgage refinancing means re-funding the mortgage loan with better terms as well as conditions, most likely from a different lender. It is one way to save money. Search online for 123 Mortgage Refinance they found me 3.1% refinance rate and also gave free analysis of my mortgage.

  4. That last post is blatent advertising.

    One question to help me understand Gonzalo: Is OPM = Other People's Money? Sometimes you use initials for organizations or expressions without giving the meaning. It would help to always give the full name in the first mention of your articles... just saying!

    One last tiny thought: Could you write an in depth article about the future direction of commodities including the precious metals based on what you see coming. The mainstream media is presenting diametrically opposing opinion but usually without much logic to back up either position.

  5. The financial meltdown of 2008 was avoidable. If the congress in 1999 had not changed policy thus allowing zero down mortgages and then mandating that Fannie Mae and Freddie Mac fund those mortgages then the meltdown of 2008 would not have happened.

  6. The FCIC Commission Report = The 911 Commission Report.

    9/11 preempted Donald Rumsfeld's $1.1 trillion "loss." that he announced on 9/10/2001.

    This farcical report will help to whitewash and cover up for the American sheeple the $14 trillion to $20 trillion (depending on who you talk to) theft by Wall Street.

    You can't blame these banksters for trying since it worked before.

  7. When money is debased and kept too cheap, it will find a way to create a bubble and THERE AINT NUTTIN THAT CAN BE DONES BOUT IT!

    All the rest of the so called "fixes" are anywhere from semi important to not important at all if money is created willy nilly.

    Like jeff goldblum said in that movie "life will find a way", well, when money is cheap "bubbles will find a way".

  8. I do believe you have the sense of it GL, well captured in this short piece. Taken altogether, the report, and dissents, lay out an accurate framework of the obvious, each of which is clouded by political bias, and therefore consensus cannot be reached.

    And such is the way the problem is being dealt with. There is division among policy makers as to what caused the crisis, and such division now prevents us from solving the problem, in much the same way that we cannot identify the root causes.

    The root cause is greed, exploitation and the selfish nature of man, i.e. "human nature".

    We are not worthy to govern ourselves, yet we continue to try, and as we do, we shit all over ourselves in an effort to get to the top of the heap, king of the hill -- New York, New York.

    "If you can make it there, you'll make it anywhere."

    But bottom line. The FED. The FED has too much power and control over the money. Whenever you give that much power to anything it becomes corrupt, and the power that assures the corruption feeds upon itself until it extinguishes all comers, the top 2% ruling over the bottom 98 as masters of a corrupt one-world government, choosing 98% slavery of mankind under it's control.

    Yes, when you let human nature go unchecked it always come to this. This is when something larger than life, something larger than human, teaches the lesson of humility.

    Extinction does that nicely. It's always the best and last lesson to refresh the universe with something "new".

    "Life" is only one dimension of existence in the universe, and we humans shape our world around it as though it is a constant baseline by which the entire universe is measured.

    It is not.

  9. Invest according to the way the world is, not as it should be. The banksters operated under the presumption that taxpayers would eat their shitty business deals, but the banksters would keep the profitable ones. Their assumption was correct, and has been since the S&L bailout.
    Thus, because politicians can't get elected if they cut benefits, we should all expect hyperinflation and invest accordingly. Water storage, canned goods, ammunition, and precious metals inside your house or buried in backyard.
    In short, we're fooked.

  10. The unreleased FCIC report:

    1) The US has been stabbed in the back by Greenspan, Hank Paulson, Robert Rubin, Senator Graham of Texas (& his wife) and Larry Summers.

    2) Wall Street and the hidden elite screwed America royally duing 2009 crisis.

    3) Obummer is owned, as is all of DC, by Wall Street.

    4) Things are going to get much worse, especially for babyboomers and retirees.

    5) The MSM will continue to lie and spin.

  11. Que americanos mas idiotas. Fake stats, false reports, blatant lies, doctored numbers; I've seen all this before in Argentina. And just like in Argentina, I'm also witnessing institutionalized fraud, a corrupt judiciary, sold-out legislators and a completely incompetent asswipe as president. Granted, at least THIS president can thread together a semi-coherent sentence in plain English. Unfortunately tho, the new guy's sentences may seem coherent but if the bastard is moving his lips at all it's because HE'S LYING.

    Party on, yanquis apestosos, you managed to get away with countless WAR CRIMES, but the FINANCIAL FRAUD you've created has come back to BITE YOU IN THE ASS!.

    Hasta la victoria, siempre!

  12. Well said senor, unfortunately. What did we expect... greed is our countries greatest virtue. We have been capitalizing at the expense of our neighbors. We need to reject society and go back to nature. The good Americans should leave while they still can.

  13. What the fuck. Where are the words "Rating Agency."

    If the CDOs were not rated triple A, no pension fund or government would have bought the stuff and the market for this product would've been small and the people who would have gotten fucked would have deserved it for buying unrated bonds.

    Side Note: If a doctor or lawyer screws up in an egregious manner, it's malpractice. This is because they are considered to be expert professionals and are held liable when they really screw up. However unlike lawyers and doctors, ratings agencies are not held liable for their mistakes. Ratings fall under the 1st amendment as they are technically considered opinions.

    Side side note: Rating Agencies have now been classified as experts under Dodd Frank, but this rule was suspended indefinitely due to Rating agencies refusal to sign up as experts and a subsequent freeze in the ABS Market. (Ford tried to sell a $1 Billion bond after the expert requirement was put in, but rating agencies would not put their ratings in a prospectus for fear of prosecution if the rating didn't hold up. The SEC then lifted the expert requirement for 6 months and then lifted it indefinitely)

  14. You have to question the true (behind the scenes?) purpose of all the blamestorming.

    Was it REALLY to isolate blame & point fingers? Or to put on a show to appease the masses with some obfuscation & confusion?

    All the rhetoric in the world doesn't amount to jack-sh*t as long as there continues to be such a huge deficit in accountability after the fact.

  15. Great article, as usual. Saw Gonzalo w/ Max Keisler recently too and enjoyed the interview. Keep it up!

  16. Nice analysis, GL.

    Great posts, posters.

    Greed was mentioned in several posts as a more fundamental reason for the credit crisis.

    I would like to add an additional "human mal-trait": pride.

    The jokers who put together this scheme of creating MBS securities, believed the computer models that showed that CDS insurance would make their product virtually risk free. THEY WERE PROUD OF THEIR CREATION. It became a cash machine for the big banks.

    -Dave in MO

  17. The problem with these "reports" is they do not attempt to address the CAUSE of the problem; they only try to address the symptoms. It's like everyone wants to cover someone's ass, but not dig in and expose the roots. The first problem happened because politicians wanted to fix a non-problem (everyone needs to own a home). History has just shown that not everyone is qualified to own a home. Most of this non-qualification can be placed upon the decisions any one of these aspiring homeowners made in the past. Many of these individuals should have remained renters. But government decided that the goal of homeownership should be instituted, without regard for anything else.

    The Justice Department, in the 1990's, decided they would enforce the Community Reinvestment Act in allowing banks to make decisions about how they conduct their own business operations. It suddenly became a requirement in allowing banks to merge, such that the department could pick winners and losers. And area lending was a major part of this process.

    When the Greenspan Fed made cheap money available through reduced loan rates, they caused people to not respect the value of saving money. Suddenly, everyone was getting the largest mortgage they could qualify for, under the easy money Fed policy and the relaxed loan standards for borrowers. Thees two factors were the root cause of the bubble in housing, whereby house prices ratcheted ever upward. I was selling real estate then, and many buyers were just looking for houses to flip; they weren't looking for a place to live. Over 90% of my business was people looking for property to flip. I knew then that it was time for a career change, because every loan officer in town was banging on my door for more business; so much of it was a new zero-down program that they started offering each new week. Most of the customers looking for a house to live in could not qualify under any responsible banker's loan guidelines, but Fannie Mae had a way for everybody. They just kept lowering the loan standards, making it impossible to turn away any potential buyer. And the easy money made it easier for buyers to qualify for higher house values, setting in motion the unrealistic increases in real estate values.

    Can anyone else say, This is madness?

  18. FCIC

    Coverup of
    Investment bankers

    or - how about

    Concealment for the
    Ignorant publicly educated
    Common peons

    23% of Nevada homeowners with the ability to pay their mortgage are now in default. That is Economic Anarchy.

  19. John,
    David said...
    "9/11 preempted Donald Rumsfeld's $1.1 trillion "loss." that he announced on 9/10/2001."

    Correction sir. That should read read 2.3 Trillion.

    Great article and comments folks. I especially agree about the rating agencies being full of shit and WORTHLESS enablers. Our whole system/economy is fraud on top of fraud on top of fraud. Depressing.

  20. "This of course is bullshit—and bullshit that everyone knows: Interest rates were low starting in 1992 because Easy Al—that is, Fed Chairman Alan Greenspan—kept them low, goosing along the American economy whenever it threatened to slow down."

    Except of course the housing bubble didn't start until that capital looking for unreasonable profit started to pour in. Other than that it's BS.

    "Wallison is dead right—and points to how both the Clinton and Dubya administrations are equally responsible for having fomented home-ownership to the point of helping to create a housing price bubble."

    Except of course Clinton's administration was when the bogus redlining charges came out and when the CRA was made ultimately toxic, and W did try to raise loan requirements in the FMs. Other than those facts which torpedo your ship of stupid, responsibility is equal.

  21. I regularly follow you Gonzalo, and I'd like to take this opportunity to congratulate you on your CENSORSHIP FREE commentary policy, which is as rare these days in America as are accountability & rule of law.

    It seems almost IMPOSSIBLE to say something truly critical of the U.S. government and/or its policies on most major media reader's forums these days without being censored, edited or outrightly BANNED, as I personally have experienced MANY times. And if one dares bring up in protest the fallacy of "freedom of speech", forum owners will promptly respond that theirs is a PRIVATE site and that if you want to state your opinion (as one webmaster once told me) then you can go "shout it from a public street corner".

    Gonzalo: Thanks for leaving us a little corner from which to shout, and congrats on your own shouting skills!

  22. As the commission report notes (p. 17), financial sector debt went from $3 trillion in 1978 to $36 trillion in 2007. How can you explain the _increase_ in debt merely by saying that the Fed's low interests are responsible? I.e., unless I grossly misunderstand the Fed's role in the economy, it determines interest rates but also determines how many treasury bonds to buy and sell on the open market. Thus the exponential increase in debt could only have been the result of conscious Fed policies to create a debt bubble in the financial sector.

    Although I can't discount this possibility, the $5 trillion of outstanding obligations that Fannie and Fredde Mac held at the time of their takeover, along with the large percentage of each that the Banks of China and Japan held, make it a lot more easy to believe that China and other foreign players had a hand in the creation of a debt bubble post-2000 in the U.S.

    (The last report I can find on foreign holdings of FMAC debt is from September 2000; it says that the increasing size of the stakes in FMAC debt held by foreign investors is due to a _decrease_ in the supply of T-bills.)

  23. Nice post! Keep it up the good work.


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