"The Angelides Commission's Conclusions - Analytical or Poliitical?"

Sydney M. Williams

Thought of the Day

“The Angelides Commission’s Conclusions – Analytical or Political?”

January 31, 2011

It began as a subtle shift in cultural attitudes, which became amplified over many years – in fact decades – that permeated the American psyche. The changes were abetted by a government more focused on equality of outcomes rather than opportunities. Layered on were myriad, innovative financial products, a consequence of new technologies. Combined, they led to the near collapse of the financial system in the fall of 2008. That was not the conclusion reached by the Financial Crisis Inquiry Commission; it is, though, my opinion.

The Commission found no absence of institutions to blame – Wall Street, regulators, banks, and real estate and mortgage brokers. It also cites a number of individuals, including Angelo Mozilo, Alan Greenspan and Robert Rubin. It essentially provides a pass to Congress and even implies that Fannie Mae and Freddie Mac followed the banks over the cliff.

The roots of the problem, in my opinion, go back a generation. The early 1980s saw a sea change in America – financial markets, after a decade and a half of slumber, roared back to life; confidence in the “shining city on the hill” was restored after fifteen years, which was characterized by a divisive war in Vietnam and a recession marked by high inflation and higher interest rates. Advances in technology permitted the development of derivatives, thereby allowing financial institutions to operate with increased leverage. However, change was underway. By the end of the 1970s, even Jerry Rubin, a one time anti-war activist, founder of the “Yippie” movement (Youth International Party) and one of the Chicago Eight became a businessman and early investor in Apple.

“Yippies” were replaced by “Yuppies” (young urban professionals) – a derogatory term, first used by Gary Hart in 1984, for young professionals working (mostly) in the financial sector and for whom conspicuous consumption became a way of life. Barton Biggs referred to their large new homes in suburbs such as Greenwich as “starter castles.” Their lifestyles became celebrated in books like Tom Wolfe’s Bonfire of the Vanities and Marissa Piesman and Manlee Hartley’s The Yuppie Handbook. Also, movies like “The Big Chill” and “When Harry Met Sally” publicized this new culture, which was noted for its emphasis on “me”. Television and the Internet only hastened the spread of this changing lifestyle.

It is unsurprising, then, that millions of others, who were not beneficiaries of inflated incomes, aspired to the same toys, including houses. Low interest rates, improving stock and bond markets, newly fashioned financial instruments (such as adjustable rate and interest-only mortgages) and favorable government legislation, such as the Community Reinvestment Act conspired to help millions achieve their dreams fertilized by this cultural change that swept across our country…and the world.

A Congress whose re-election campaigns had become increasingly dependent on funds from financial institutions, including Fannie Mae and Freddie Mac, looked the other way when it came time to scrutinize those regulatory bodies responsible for enforcement of commonsensical rules. Despite the bursting of the tech-internet bubble in 2000, an absence of bankruptcies had made most investors, bankers, homebuilders, consumers and politicians unusually complacent by late 2006 and early 2007. Derivatives, which had been used for years and without which modern day finance could not function, allowed financial firms to expand leverage to unrealistic levels. (In the case of the GSEs it approached 75 times, according to The Financial Crisis Inquiry Report.) Hubris replaced prudency. And, of course, greedy and nefarious bankers and brokers got caught up in the race for riches.

The Commission’s report is no doubt political. Excluding the introduction and conclusion, it runs to 450 pages, of which 40 are devoted to dissenting opinions from the four Republicans. (Peter Wallinson’s – an American Enterprise Institute Scholar and member of the Commission – 100 page dissent was not included in the publication made available.) The main body of the report concludes that the crisis was avoidable. Perhaps, but I suspect that the causes were sowed so deep and were embedded so fixedly in the American psyche that what happened may have been inevitable. (In my opinion, the fact that the financial system held is the real story.) I find it incredible, after glancing through the report, that banks “too big to fail” have not only survived, but have thrived. I further sense that Representative Phil Angelides and his team confuse cause with effect. Actions have consequences and so do new products.

Joe Nocera, writing in Saturday’s New York Times, came closest, in my opinion, to describing the real cause. He used as an example the tulip mania of early 17th Century Holland, suggesting that “the roots of ‘tulipmania’ were less the actions of particular Dutchmen than the fact the entire society was suffering under the delusion that tulip prices could only go up.” The same perspective infected homeowners around the developed world. However, despite all the criticism, including mine, the Report includes a wealth of information, which will be mined I am sure by an enterprising and insightful novelist whose fictional account of this period will come closest to revealing the incredible culture that caused this near disaster.

The effects of those halcyon days linger on in the expected (versus actual) returns of many defined benefit pension funds, especially those run for state and local unions. Those expectations, which bear no resemblance to reality, risk bankrupting governments, as they did the auto companies and other businesses that relied on defined benefit plans to attract and keep workers. Parties always come to an end. The stock bubble burst eleven years ago; the housing bubble five years ago, and now we face the effects of government promising more than can be reasonably delivered. These bubbles are a function of a culture nurtured in a belief in fantasies. Greed and criminal activity certainly played a role, and the culprits should be punished. But the real blame is far more complicated and is all-encompassing; it is the result of a culture cultivated and sustained by a society, including Washington and the media. This, too, though, will change.