The FCIC Report: Sound and fury, sig­ni­fy­ing noth­ing

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I’ve just wasted a per­fectly good day read­ing the report of the Finan­cial Cri­sis Inquiry Com­mis­sion–the body appointed by Con­gress allegedly to inquire into what caused the Finan­cial Cri­sis.

What it has deliv­ered reads more like an unedited the­sis by a jour­nal­ism stu­dent (who is about to receive a “C” grade). There are plenty of quotes, lots of detail, some nice sec­tion head­ings and a few pretty graphs, but absolutely no analy­sis wor­thy of the name.

And I thought the WEF report on credit was bad… At least that report actu­ally con­sid­ered the level of credit and the role of credit in a mar­ket econ­omy. It had sim­plis­tic assump­tions and reached sim­plis­tic con­clu­sions, but at least it engaged with the topic, and its attempt to devise met­rics for mea­sur­ing the degree of credit stress deserved some praise.

But this FCIC report was sim­ply a waste of time. All I got out of the entire tome was one good anal­ogy about why the rat­ings agen­cies (Moody’s and the like) got the prob­a­bil­i­ties of defaults by mort­gagors so badly wrong:

In rat­ing both syn­thetic and cash CDOs, Moody’s faced two key chal­lenges: first, esti­mat­ing the prob­a­bil­ity of default for the mort­gage-backed secu­ri­ties pur­chased by the CDO (or its syn­thetic equiv­a­lent) and, sec­ond, gaug­ing the cor­re­la­tion between those defaults—that is, the like­li­hood that the secu­ri­ties would default at the same time.

Imag­ine flip­ping a coin to see how many times it comes up heads. Each flip is unre­lated to the oth­ers; that is, the flips are uncor­re­lated. Now, imag­ine a loaf of sliced bread. When there is one moldy slice, there are likely other moldy slices. The fresh­ness of each slice is highly cor­re­lated with that of the other slices. As investors now under­stand, the mort­gage-backed secu­ri­ties in CDOs were less like coins than like slices of bread. (p. 145)

But that’s about it: oth­er­wise there’s lots of detail, and almost no insights worth even com­ment­ing upon. To my sur­prise, I found myself sid­ing with the dis­sent­ing mem­bers of the Commission–not because their analy­sis was much bet­ter, but because they had the hon­esty to describe the major­ity report as sim­ply use­less. As one of the sev­eral dis­sent­ing reports put it:

The majority’s almost 550-page report is more an account of bad events than a focused expla­na­tion of what hap­pened and why. When every­thing is impor­tant, noth­ing is. (p. 414)

The same dis­sent­ing report makes some sen­si­ble state­ments about what the Com­mis­sion should have con­sid­ered, and then con­cludes:

These facts tell us

  • that our expla­na­tion for the credit bub­ble should focus on fac­tors com­mon to both the United States and Europe,
  • that the credit bub­ble is likely an essen­tial cause of the U.S. hous­ing bub­ble, and
  • that U.S. hous­ing pol­icy is by itself an insuf­fi­cient expla­na­tion of the cri­sis.
  • Fur­ther­more, any expla­na­tion that relies too heav­ily on a unique ele­ment of the U.S. reg­u­la­tory or super­vi­sory sys­tem is likely to be insuf­fi­cient to explain why the same thing hap­pened in parts of Europe. This moves inad­e­quate inter­na­tional cap­i­tal and liq­uid­ity stan­dards up our list of causes, and it moves the dif­fer­ences between the reg­u­la­tion of U.S. com­mer­cial and invest­ment banks down that list. (p. 416)

That’s about all that is worth­while in this entire report. All it amounts to is a jour­nal­is­tic overview of the events from early 2005 till late 2010. It’s rea­son­able as such–I’m sure some resource­ful if unimag­i­na­tive Hol­ly­wood hack writer could mine the doc­u­ment for a movie or two  about the cri­sis. But as such it’s hardly new (Hank Paulson’s insider account of the cri­sis in “On the Brink” was far more timely and cer­tainly more excit­ing) and cer­tainly not worth the pub­lic dol­lars that would have been expended on it.

If this is the best the US Con­gress can do, then the USA can look for­ward to many more years of this crisis–and many more crises in future.

If you do have to read the report, then please don’t waste any money buy­ing it–just down­load the PDF instead (I’m sure the hard­back will be in a remain­der bin at a nearby book­shop in the very near future).

Now I’ll get back to a worth­while use of my time–finishing the sec­ond edi­tion of Debunk­ing Eco­nom­ics. In clos­ing, to make up for your time wasted read­ing this, here’s the verse in which that won­der­ful phrase “Sound and fury sig­ni­fy­ing noth­ing” entered the Eng­lish lex­i­con: Act 5, Scene 5 of Shakespeare’s Mac­beth, when Mac­beth is told that Lady Mac­beth is dead:

She should have died here­after;
There would have been a time for such a word.
To-mor­row, and to-mor­row, and to-mor­row,
Creeps in this petty pace from day to day
To the last syl­la­ble of recorded time,
And all our yes­ter­days have lighted fools
The way to dusty death. Out, out, brief can­dle!
Life’s but a walk­ing shadow, a poor player
That struts and frets his hour upon the stage
And then is heard no more: it is a tale
Told by an idiot, full of sound and fury,
Sig­ni­fy­ing noth­ing.

About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
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  • @ Gor­don

    Have you heard of Cryp­tome or any of the whistle­blower sites that have been going for much longer than Wik­ileaks – all strug­gling for fund­ing? Of course not.”

    I always, a pri­ori, look for ‘assump­tions of argu­ment’ first and fore­most in argu­ments such as yours where in your post cum argu­ment, your first assump­tion is well, just wrong (what a ridicu­lous foun­da­tion for an argu­ment. Of course, I know of Cryp­tome (I won­der what the prob­a­bil­ity of that was?) as well as many other sites that leak infor­ma­tions, in fact such activ­i­ties used to be the wet-dreams of MSM but now usurped by blog­gers such as Drudge, Rense and myr­i­ads of oth­ers. FYI, like many oth­ers, I have been con­nected to the Inter­net since the mid to late ’80’s and now being retired, spend a con­sid­er­able amount of my time er, “surf­ing” and “seek­ing”.

    You state “… he prob­a­bly does deserve the cover of Time Mag­a­zine and a Nobel Peace Prize.”

    It is not for me to judge, but the point I was mak­ing is that the whole sur­round­ing issues are just hilar­i­ously amus­ing and indeed ludi­crous, and that such awards being granted to the likes of Kofi Annan, Paul Kruger (econ.), Bar­rack Obama, Al Gore Jr. (SOL), Jimmy Carter, Elie Wiesel, et all, are the my offered evi­dence in sup­port of my argu­ment of endoge­nous humour of the human kind.

    My con­sid­ered opin­ion is that per­haps you vastly under­es­ti­mate the effects that the Wik­ileaks impacts are hav­ing and have had on Global socio-eco­nomic issues.

  • DrBob127

    Here’s an inter­est­ing inter­ac­tive graphic from the WSJ (via Zero­Hedge) giv­ing an infla­tion ‘heat map’ over many coun­tries from 2006–2009

  • DrBob127
  • Hi Brightspark,

    Hadn’t heard of Wal­li­son before, but it is a good piece of research (even if I tend to dis­agree with him on it).

    On house prices by the way, the lat­est ABS fig­ures have just been released and they show a 0.7% increase in house prices across the coun­try.

    How­ever the pre­vi­ous fig­ures have been revised: what was shown as a 0.1% increase the pre­vi­ous quar­ter has now become a 0.3% decrease. Both it and the lat­est fig­ure are also marked as sub­ject to revi­sion. So the Aus­tralian house price bub­ble hasn’t popped yet, but it is show­ing signs of peak­ing.

    I won’t write a post on this as a con­se­quence; I’ll wait till the data is more defin­i­tive, which could take 6–9 months given how slow mov­ing house prices are (com­pared to stocks) in the absence of gov­ern­ment fudges like the FHVB.

  • Pingback: Everyone fails the Financial Crisis Inquiry Commission | Steve Keen's Debtwatch()

  • noah cross
  • Eric Bosloor

    You just summed up con­gress in your quote. The econ­omy is still quite unsta­ble now despite the high level of opti­mism, and I think one wrong move could eas­ily kick us back into the finan­cial cri­sis. I have a friend who has been steadily stock­ing up on his food stor­age in case of another reces­sion. I do not think the sit­u­a­tion is that bad to war­rant stock­ing up on food, but I find myself keep­ing extra cans of tuna in my house just in the case the other shoe drops.