Now They Tell Us

The report of the Financial Crisis Inquiry Commission is due out tomorrow. Will it tell us anything new?

The partisan split in the report is old news. The Democrats on the Board fault a lack of regulation in the mortgage market. The Republicans wanted a more vigorous condemnation of Freddie and Fannie, the two mortgage giants.

The report is not sparing: two Fed Chairmen, two Treasury Secretaries, the four banking regulators, and the government’s inconsistent response–bailing out Bear Stearns but letting Lehman Brothers fail–all come in for criticism. Surprisingly, the ultra-low interest rates of 2003-2005 that were set by the Fed get a pass.

This seems illogical. Didn’t the Commission read Hayek? In the 1920s he wrote that artificially low interest rates lead to artificially high real-estate prices, which brings on over-investment, overshoot, and collapse with its attendant banking problems—loan losses, capital deterioration, and a credit crunch. Seems like a pretty good picture of our problem to me.

But the Commission said one thing that we can all agree upon. The financial crisis wasn’t inevitable, wasn’t an act of God, and wasn’t forced upon us by some outside power. The fault, it said, lies not in our stars, but in ourselves.

Douglas R. Tengdin, CFA
Chief Investment Officer
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