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The Causes of the Financial Collapse

This article was written by in Economy, Featured. 16 comments.

In May 2009, the Financial Crisis Inquiry Commission was created to determine the primary factors that drove the economy to collapse, sparking the Great Recession. Their reports will be released in just a few hours to the public. The committee consists of members from both sides of the political aisle, and opinions within the report are divided by party lines.

The New York Times got its hand on the report’s conclusions and reports that the blame touches everyone. At the end of his administration, Bill Clinton shielded derivatives from regulation, and that helped to get this particular financial free-for-all started. The commission concluded that Fannie Mae, Freddie Mac, and the government’s promotion of home ownership starting in 2001 was not a major factor, though some members of the commission disagree in a separate statement.

More blame is laid upon Alan Greenspan, who as Chairman of the Federal Reserve, didn’t curtail the housing bubble and pushed for further deregulation. For the regulation that was still within the government’s powers, the Securities and Exchange Commission is cited for being ineffective.

Though the report documents questionable practices by mortgage lenders and careless betting by banks, one striking finding is its portrayal of incompetence. It quotes Citigroup executives conceding that they paid little attention to mortgage-related risks. Executives at the American International Group were found to have been blind to its $79 billion exposure to credit-default swaps… At Merrill Lynch, managers were surprised when seemingly secure mortgage investments suddenly suffered huge losses.

The Bush administration is criticized in the report for not having a consistent response to the crisis. For example, Lehman Brothers was allowed to collapse while Bear Stearns was bailed out. Uncertainty helped to create panic within the financial industry. Credit-rating agencies were no help, either.

The report’s main conclusion is the financial collapse was avoidable.

New York Times
Financial Crisis Inquiry Commission

Updated June 23, 2016 and originally published January 27, 2011.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 16 comments… read them below or add one }

avatar 1 TakeitEZ

“Executives at the American International Group were found to have been blind to its $79 billion exposure to credit-default swaps… At Merrill Lynch, managers were surprised when seemingly secure mortgage investments suddenly suffered huge losses.”

I find it hard to believe that these executives were blind to what was coming down the pipe. Still trying to dodge any blame for their part of the collapse.

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avatar 2 Luke Landes

The commission found it hard to believe as well. The executives have the responsibility of knowing what’s going on. I can understand that sometimes they take the high-level approach and don’t have the time to go into details, but they should have asked the right questions from their people — say, those who structured mortgage-backed securities — and shouldn’t have been blind to where the risk was going to be.

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avatar 3 Anonymous

The report misses the mark. The cause was very simple. It was jerking the price of money around. Pushing the federal funds target rate to 1% in 2003 and holding it there for a year in the face of a fairly strong housing/auto markets is what set off the gold rush in the housing market. House price skyrocketed, housing equity became ATMs, esoteric mortgages were created – everybody could own a house . Then once people were sucked in the price of money was jerked sharply higher and people saw that the housing market would soften, ARM would rise sharply etc.
Market forces should control interest rates not so-called “maestros” or former Princeton academics. Derivatives, regulators, Fannie and Freddie will all be blamed but they are scapegoats. It was arrogance pure and simple by those who seek to set prices to manipulate the economy, no different from what brought down the former Soviet Union.

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avatar 4 tbork84

Avoidable, yes. Now the trillion dollar question is whether or not the lessons we have learned and actions we have taken will prevent the next financial crisis. Anyone care to bet on it?

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avatar 5 Anonymous

Three of the FCIC members filed a dissenting statement. They are Keith Hennessey, former director of the National Economic Council, Douglas Holtz-Eakin, former CBO director, and Bill Thomas, a former chairman of House Ways and Means (tax law writing committee). If you read the first 7 pages of the 27 page dissent, you’ll get the drift. They also have an op-ed in the Wall Street Journal.

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avatar 6 rewards

Care to share the drift?

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avatar 7 Anonymous

I should have left the link before. Keith Hennessey has his own website in which he discusses fiscal policy and economics. If you want to read the entire report, here it is. If you want a good summary of the document, skip down to the heading “The Ten Essential Causes of the Financial and Economic Crisis.” Each comes with an explanation, so it’s too long to copy here, but definitely worth reading.

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avatar 8 skylog

thanks for the link josh

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avatar 9 Anonymous

Well, there are a million different problems, but I can say that the biggest problem was the “solution.” Should have let them fail.

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avatar 10 Anonymous

I couldn’t possibly agree more!

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avatar 11 gotr31

I totally agree! It seems like the more the government tries to help the situation the worse it gets!

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avatar 12 Anonymous

Im rather surprised that it doesn’t lay any blame on the shoulders of the consumer. While I believe that this wasnt possible without the banks offering loans to people that couldnt repay them. They took on the risk, then they got burned and bailed out for it. The consumer took on the risk as well, but no one twisted their arm to do it (although it seems obvious that at least some of them were lied to). No one made people refinance and pull cash out of their house 3 times in five years – their lack of budgeting and poor financial skills drove them to that point.

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avatar 13 skylog

i totally agree. while i do feel the financial industry as a whole, as well as many aspects of government played a major role, i simply can not disregard the role of the consumer in the collapse. ultimately, they were the ones putting their signatures on the line. it just blows my mind how casually many people were making what should be major life decisions with little or no thought, reasearch or concern.

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avatar 14 4hendricks

I agree we should have let them fail, nothing has changed – they are still getting richer, others are just losing everything. Give the money back to the public.

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avatar 15 Anonymous

The ineffective regulation reminds me of the development in Greece when the EU officials and authorities didn’t do anything to disclose the information about the country’s rising debt which later resulted in the terrible financial crisis that the Greek people have to go through now.

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avatar 16 eric

So everyone/everything was pretty much to blame for the Great Recession that could have been avoidable. Hmm…..I am simultaneously feeling smug about knowing this already and depressed for seeing it to be true.

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