Five years ago a financial cataclysm plunged the U.S. and global economies into the Great Recession. During the years since, there has been a directed repetition of a simple narrative regarding the crisis: greedy bankers knowingly manipulated the financial system and politicians in Washington to take advantage of homeowners and mortgage investors alike, creating a housing bubble and jeopardizing the economy while enjoying huge personal gains. This narrative was politically motivated and drove the regulatory reforms in the aftermath of the crisis.
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The congressionally chartered Financial Crisis Inquiry Commission (FCIC), on which we both served, was supposed to investigate and explain the causes of the financial crisis to policymakers and the American people. The FCIC report reinforced the class warfare theme centered on greedy Wall Street actors.
Unfortunately, this narrative is simply wrong.
We (along with Keith Hennessey) issued a dissenting FCIC report, which we believe offered a more nuanced and factually accurate vision of the crisis. The multitude of financial-firm failures, spanning varied organizational forms and differing regulatory regimes across the United States and Europe, makes it impossible that the crisis was the product of a small coterie of Wall Street bankers and their Washington bedfellows.
We believe the crisis was the product of at least 10 major factors, all detailed in our dissent at the time the FCIC completed its work. Our explanation is multifaceted and at times complex, but we believe that the meltdown of our large and complicated financial system is itself a complex affair.
Our explanation is not an easy tale to spin from behind the microphones at a press conference, from the dais at a congressional hearing, or more recently during a white-collar perp walk. It is easier and more politically useful to blame those who put their self-interest above borrowers, investors, taxpayers and even their own firms. It is simpler to point to a housing market distorted by government policies and the ticking time bombs, the GSEs Fannie Mae and Freddie Mac. But easy and simple are incomplete and dangerous.
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The class warfare narrative not only was easy to communicate, but it also has had great political value for the advocates of increased government regulation. With populist appeal, this narrative greased the wheels for passage of Dodd-Frank. It has led to calls to restore Glass-Steagall even though there is zero evidence that proprietary trading losses produced the crisis. It launched a massive regulatory effort on financial derivatives, even though only one derivative (credit default swaps) at only one firm (AIG) was involved in the crisis. It has produced inordinate focus on financial firms, especially large banks, as if the crisis emanated from them and could have been nipped in the bud by stringent regulation. It deceived some into thinking that no housing bubble could occur if everyone were forced into a cookie-cutter mortgage and the GSEs were unwound.
Perhaps most damaging, the class warfare narrative produced, on a bipartisan basis, the caricature of Federal Reserve and congressional emergency responses as corrupt “bailouts” of the favored, instead of well-intentioned and broad-based efforts at national economic health.
The U.S. economy is repairing itself from the financial crisis, albeit slowly. While our labor markets remain battered, home prices have begun to improve, and the household balance sheet is strengthening. Even remaining large U.S. banks -- while having to incur new, complex and uncertain regulatory and legal burdens -- have continued to deliver valuable services to U.S. families and abroad.
Despite the recovery, the true causes of the financial crisis and the debate over the most appropriate role for policymakers should not be cast aside. We believe the American public still deserves an even-handed, lucid explanation of the crisis. And it is not too late for Congress and the Administration to turn such an effort into a sensible regulatory roadmap for the future.
Douglas Holtz-Eakin serves as the President of the American Action Forum and is the former Commissioner of the Financial Crisis Inquiry Commission. Bill Thomas is the former Chairman of the House Committee on Ways & Means and the former Vice-Chair of the Financial Crisis Inquiry Commission.