The Crisis

Last week the Financial Crisis Inquiry Commission issued its report. What did we learn?

There were a number of non-surprises. It was no surprise that the commissioners disagreed—along party lines. It was no surprise that it had no plan to deal with Freddy and Fannie, the two biggest fiscal black holes. It’s no surprise that the new Congress is discussing investigating the investigators.

What is a surprise is that they didn’t find a scapegoat. The Commission concluded that the housing bubble’s collapse caused hundreds of billions of mortgage-related losses and this led to the Panic of 2008. The bubble wasn’t caused by any single party, but by the bankers, the Fed, the Congress, the investors, and the borrowers who rode this train until it was too late to get off. All bear responsibility.

In other words, the enemy is us. In that sense, the report doesn’t tell us anything new. If the enemy is human nature, then it’s also no surprise that the crisis was global. Banking is globally interconnected, and bankers and bank regulators are subject to the same temptations everywhere.

To that extent, it’s not different this time, and it’s not different anywhere else. In order to have a modern economy, we need a modern financial system that efficiently mobilizes savings in Shanghai to finance trade receivables in Amsterdam. But with a global system comes the potential for global contagion.

Can the next crisis be avoided? I don’t think so. Human nature doesn’t change. Each failure creates the seeds for the next success, and vice versa. The decks are cleared of bad ideas, and capital goes back to work. For good or ill, all our eggs are in one global basket. The key, as Mark Twain put it, is to WATCH THAT BASKET.

Douglas R. Tengdin, CFA
Chief Investment Officer
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