Zywicki in Kiplinger: Financial Crisis Probe Misses Larger Issues

Last week's Financial Crisis Inquiry Commission hearings missed the larger issues of the nation's critical problems in the mortgage market, says Professor Todd Zywicki, pointing to some of the factors that led to the first wave of home foreclosures. Existing tax policies encouraged home ownership, as well as home equity loans, while low interest rates led to lax lending policies and adjustable rate mortgages. When the housing bubble burst, many homeowners with low equity and high mortgages simply elected to walk away from their homes.

The article points out that the commission's effectiveness is minimized by the timing of its report, scheduled for release December 15. By then Congress already will have made up its mind on financial reform as it directs its focus to the November elections.

Financial Crisis Probe Misses Mark, Kiplinger, April 12, 2010. By Renuka Rayasam.


"Sure, credit rating agencies, regulators and banks were foolish to rely on models that assumed home prices would forever go up. If last week’s hearings could have done any good, they would have reminded us that the stability of our financial system should not entirely rely on fallible human judgment. But the lessons will fall on deaf ears. Financial regulatory reform now making its way through Congress does little to address the structure of finance and instead simply hands error prone humans even more discretion.

"Because the reform bill doesn’t get around the fact that bubbles are hard to spot and even harder to pop, it will not be very helpful in heading off the next crisis. At last week’s testimony, even Greenspan admitted he got things wrong 30% of the time. You’d get better odds at the Kentucky Derby. As housing economist Thomas Lawler reminded me, in 2005, when subprime mortgage originations peaked at $625 billion, 'There were a lot of people who were not complete idiots, saying there wasn’t a bubble.'”

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