In February 2004, future Federal Reserve Chairman Ben Bernanke penned a paper titled “The Great Moderation,” a celebration of a sunny new era of economic stability. Deregulation and “increased depth and sophistication of financial markets” were in part responsible for the decline in economic volatility, he wrote.
It’s too bad that Bernanke wasn’t with me at the Elephants Deli on Kruse Way in 2005. I was meeting a mortgage broker on that sun-drenched afternoon. The housing market was running flat-out and the mortgage industry was awash in money. But he was miserable.
The broker talked in apocalyptic tones about frighteningly sloppy lending that had become pervasive. He told me about a new kind of wink-wink, nudge-nudge home loan in which the lender made no effort to verify the applicant’s purported income.
He laid it all out — the whole daisy chain of the modern mortgage industry that had convinced itself, and the outside world, that it could spin garbage into gold.
I didn’t get it. I failed to grasp the destructive potential of the industry’s new go-go mentality. And I blithely walked away.
I offer this anecdote not only as mea culpa, but also to illustrate one of the central truths of the just-issued congressional report from the Financial Crisis Inquiry Commission. The financial meltdown that has ruined so many lives was not caused by an uncontrollable, unanticipated convergence of events. This was a largely predictable and avoidable crisis caused by the breakdown of traditional practices and discipline in the financial industry.
Had Bernanke or his predecessor, Alan Greenspan, bothered to ask, even rank-and-file brokers here in Portland would have given them an earful about the looming catastrophe.
The commission’s 600-plus page report spares no one. The mortgage industry, the big banks, Wall Street, the ratings agencies, Fannie Mae and Freddie Mac and the regulators all take a pounding.
“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,” the majority report states in its executive summary.
We’re now a poorer country, with diminished expectations to match our diminished buying power. But have we learned anything? Are we in a better position to avoid the next economic bubble?
From: http://ping.fm/D61xk
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