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June 10, 2012
David Warsh, Proprietor


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A Mind Made Up

One of the heroes of the near-meltdown of 2008 is Phil Angelides. A two-term former treasurer of California with a reputation for integrity, he was hired while the sense of peril was still fresh to chair a Federal blue-ribbon commission (six Democratic legislators, four Republican, fifty staffers).  Its mission: examine the causes of the financial crisis and help policy makers and the public better understand “how this calamity came to be.”

Angelides pledged a straight account, and, against the odds, he produced one. The proceedings of the Financial Crisis Inquiry Commission didn’t resemble those of the emotional  Pecora hearings of 1932-34. They weren’t like those of the Brady Commission, either, or the relatively technical report it produced on the memorable day in 1987 when the Dow Jones Industrial Average lost nearly a quarter of its value in a few hours.

Instead, the Financial Crisis Inquiry Commission Report , which came out in January last year, is the best narrative account of the crisis, and likely to remain so for many years.

Rather than simply round up the usual suspects – caricatures of greedy bankers, conniving legislators, suborned ratings agencies, overconfident regulators, the Community Reinvestment Act – the FCIC Report adduced necessary background information on all these characters, and then concentrated on explaining the main event, the panic.  The origins of securitization and derivatives markets, the history of deregulation, the evolution of shadow banking, the inducements to subprime lending in the housing market, the ineluctable logic of the boom and bust:  all these are described with patience and clarity.

But a third of the book, its heart, deals with the events of the panic itself – the August 2007 “Quantquake,” the first tremors that autumn in the money market funds, the collapse of Bear Stearns, the takeover of Freddie and Fannie Mae and Freddie Mac, the bankruptcy of Lehman Brothers, the bailout of AIG International, and the crisis itself, the two weeks during which, as Federal Reserve Chairman Ben Bernanke told the FCIC, twelve of the thirteen largest institutions in the US were at risk of failing – a situation potentially more dangerous than that which led to the Great Depression.

The FCIC Report didn’t get the attention it deserved.  It arrived in January 2010, just as partisan rancor escalated sharply. US Rep. Darrell Issa (R-Calif.) browbeat Angelides before his Subcommittee on Government Operations. And the resignation midway through the task of columnist Matt Cooper, of Time magazine, who was to have been the lead writer for the report, didn’t help.

But Angelides’ report permitted serious commentators to look past a great deal of routine culprit-bashing in order to focus on the real problem — the bank run.  Many have dwelt on the the role of government h0me-ownership policy in fomenting the housing bubble, including columnists/authors Gretchen Morgenson and Joe Nocera, both of The New York Times, and, of course, the editorial page of The Wall Street Journal.  And it is certainly true that the bubble’s precipitated the panic. But Holman Jenkins, the shrewd WSJ columnist, had it right in the spring when he wrote, in The Fannie and Freddie Hate Storm (subscription required),

Yes, we had a housing bubble. Yes, we had deterioration in lending standards. Fannie and Freddie had a role in both. And bordering on lunatic is the claim that Fannie and Freddie came late to subprime so are innocent of the consequences. Even if the premise were true, by definition the last money in, not the first money in, defines a bubble.

But these things did not lead inexorably to the panic of 2008. The housing losses should have been manageable by the financial system. A systemic meltdown came instead because a handful of giant financial institutions in theU.S.andEuropehad leveraged up with short-term and even overnight borrowings in order to hold complex mortgage derivatives that suddenly became illiquid and hard to value.

The Crisis Commission wasn’t chartered to make policy recommendations to Congress, so its conclusions were comparatively mild.  It noted that failures and mergers during the crisis had left the USfinancial sector more concentrated than ever before.  This consolidation in the hands of a very few, large, systemically significant institutions, it noted, “places more responsibility than before on regulators for effective oversight.” Congress produced the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Last week Angelides appeared at the Center for National Policy, a centrist Washington D.C. think tank, and, for the first time, called for the break-up of the nation’s largest banks.

[T]heir fierce resistance to any kind of reasonable change, the unrestrained use of their enormous political power and their willingness to use whatever means necessary to bend the political system to their self-interest without respect to the public interest, have provided in my mind the conclusive evidence that a modern era of trust-busting is now essential….

Here we are, two years after Dodd-Frank, there’s still no Volcker Rule after a voracious and sustained attack to eviscerate it by financial institutions. And of course those efforts have been bolstered, I want to be blunt, by the Republican allies of Wall Street in Congress who have tirelessly tried to strip funding from the Securities and Exchange Commission, from the Commodities Future Trading Commission, and have made an art form of blocking appointments to key regulatory positions that oversee our financial system.

Angelides didn’t say so, but it’s always possible that the banks continue to dig in their heels because a proposal for “reasonable change” to which they could be expected or compelled to acquiesce has yet be proposed. Those that have been broached – more tightly limiting their size relative to the overall market, tearing away over-the-counter derivatives activities, stripping away the ability to underwrite securities – have failed to attract much support. Perhaps there are others. The hard part, said Angelides, would be simply deciding that it needs be done, in the name of stabilizing competitive capitalism.

An unsuccessful candidate for governor of California against Arnold Schwarzenegger in 2006, Angelides remains a Democrat. Last week he said,

If Mitt Romney were to win this election, we will forgo any real opportunity to debate these issues, let alone resolve them in the public interest.  His two-headed monster of an economic agenda is absolutely clear, and that is deregulation of the financial system and a pursuit of European style austerity.

About to turn 59, Angelides is young enough to run again for something. Let’s hope he does.

.                          xxxx

I have sometimes touted The Browser. This London-based curator of “writing worth reading” recommends a daily diet of articles published elsewhere (including, occasionally, here).  Those cover an immense spectrum of interests: arts & entertainment, politics, business and economics, lifestyle, science & technology, sport, people, travel, society, philosophy & religion, history.

The magazine also commissions material for its use, chiefly a series of interviews for a feature called “Five Books” in in which an author describes five favorite titles by other writers:  Jonathan Rauch on Marriage, Jay McInerney on Essential New York Novels, Robert Barro on The Lessons of the Great Depression, and so on.

This week would be a good week to take a look.  Ariel Rubinstein, of theUniversity ofTel Aviv, answers questions about game theory, then chooses – well, four titles. There’s nothing very surprising about them. The fifth book, about which Rubinstein is a little coy, is especially interesting.

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