The Financial Crisis Inquiry has delivered its report on why the financial crisis happened, attempting to explain to the American people what happened and why, so that it can be avoided in future. If you want the whole report, you can get it here.
Here are some summary conclusions, which I’m going to reproduce in their own words as it’s an important document:
- We conclude this financial crisis was avoidable. The crisis was the result of human action and inaction, not of Mother Nature or computer models gone haywire. The captains of finance and the public stewards of our financial system ignored warnings and failed to question, understand, and manage evolving risks within a system essential to the well-being of the American public. Theirs was a big miss, not a stumble. While the business cycle cannot be repealed, a crisis of this magnitude need not have occurred.
- We conclude widespread failures in financial regulation and supervision proved devastating to the stability of the nation’s financial markets. The sentries were not at their posts, in no small part due to the widely accepted faith in the selfcorrecting nature of the markets and the ability of financial institutions to effectively police themselves.
- We conclude dramatic failures of corporate governance and risk management at many systemically important financial institutions were a key cause of this crisis. There was a view that instincts for self-preservation inside major financial firms would shield them from fatal risk-taking without the need for a steady regulatory hand, which, the firms argued, would stifle innovation. Too many of these institutions acted recklessly, taking on too much risk, with too little capital, and with too much dependence on short-term funding.
- We conclude a combination of excessive borrowing, risky investments, and lack of transparency put the financial system on a collision course with crisis.
- We conclude the government was ill prepared for the crisis, and its inconsistent response added to the uncertainty and panic in the financial markets.
- We conclude there was a systemic breakdown in accountability and ethics.
- We conclude collapsing mortgage-lending standards and the mortgage securitization pipeline lit and spread the flame of contagion and crisis. When housing prices fell and mortgage borrowers defaulted, the lights began to dim on Wall Street.
- We conclude over-the-counter derivatives contributed significantly to this crisis. The enactment of legislation in 2000 to ban the regulation by both the federal and state governments of over-the-counter (OTC) derivatives was a key turning point in the march toward the financial crisis.
- We conclude the failures of credit rating agencies were essential cogs in the wheel of financial destruction. The three credit rating agencies were key enablers of the financial meltdown. The mortgage-related securities at the heart of the crisis could not have been marketed and sold without their seal of approval.
The Earthbound Report 
And what will happen? Nothing! The biggest banks are bigger and more powerful than ever before – almost beyond imagination. The global casino is re-opened. What gave me goose bumps was the sentence “We conclude there was a systemic breakdown in accountability and ethics.” Last night I watched a movie called “Hasenjagd” (hare hunting). It was about real events that occurred in the small Austrian village of Mühlviertel in 1945, just before the end of WWII. Wikipedia says: “In February 1945, around 500 Soviet prisoners escaped from Mauthausen-Gusen concentration camp in the Mühlviertel. Local civilians, soldiers and local Nazi organizations hunted down the escapees for three weeks, murdering most of them. Of the original 500 prisoners who took part in the escape attempt, eleven managed to succeed, remaining free till the end of the war.”
This sounds ugly enough, but what really happened is even more unsettling. Those 500 Soviet officers were guilty of no crime (as was pointed out repeatedly by the village police officer, who had ordered his men to not participate in the man hunt. The policemen were then forced by the SS at gunpoint to participate). The Russian prisoners did what every soldier does in a war situation: they refused to cooperate with the enemy. Ultimately they decided to break out of the concentration camp because of torture and starvation. Almost half of these young men were killed in machine gun fire during the breakout. The others ran off into the snow covered mountains and forests – barefoot, wearing only their striped pyjamas. What happened then was a complete breakdown of human civilization: the local SS brigade managed to create an atmosphere that turned ordinary citizens into bloodthirsty killers and brought deep psychopathic tendencies in some to the surface. The village people – actually the village men – were armed, hobby hunters joined in, and together with SS and SA units practically all escaped prisoners were murdered. These were ordinary Russian boys slaughtered in many cases by ordinary civilian men. Only a handful of the few villagers that remained sane dared to help, because they themselves all feared instant execution for non-compliance by the SS. In the end absolutely ordinary people actively had participated in murdering almost 300 starving, barefoot innocent young men. Many of those murderers were law abiding farmers, craftsmen, convenience store owners and regular church goers.
Nazi comparisons always have a stale by taste, but I think the hair raising lesson the Nazi history teaches mankind is, that many humans are capable of submitting to the totally inhumane logics of any given system they are embedded in. And the vast majority is too full of fear and too powerless to stand up. My impression is that Bankers and Brokers and also many Top Managers in multi national corporations suffer from that very same disease. They do indeed believe, at the deepest level, that the logics of finance, business, profit, money, is the only logics that exist. As if the rules of finance were a natural law placing those who represent it above the laws and affairs of us ordinary humans. The result is: a systemic breakdown in accountability and ethics. This sentence points towards the potential monster in all of us. A bloodthirsty, greedy, selfish satanic force.
Moloch, as Alan Ginsberg puts it in his poem Howl, the monster that consumes us.
The report really only tells us what we already knew, that there has been widespread dishonesty and greed, and failure to regulate at every level. Everybody knew it then, and they know it now, but as long as the show is on the road nobody cares – which is why the calls for restraint and reform vanished as soon as the stock market was back in bear territory and the banks were making money again.
I hope that if nothing else, the report shames the US government for not doing more to fix the situation, preferably in time to prevent the next crash.
The ineffective financial regulation and the failure to heed the warnings mentionded in this report reminds me of the development in Greece when the EU officials kept secret all information they had about the country’s rising debt which later resulted in the terrible escalation of the whole situation.