Why Is Washington Ignoring The Real Causes Of The Crisis?

Atlantic Correspondent, Richard A. Posner, has another spot-on blog post this morning. He begins by considering whether it's possible the Financial Crisis Inquiry Commission will produce anything of value, and then moves on to explain how current regulatory proposals fail to address the real causes of the financial crisis. I'm not going to quote much of it in what follows, so you probably want to read the entire five-paragraph post here. I agree with it entirely and offer an additional a helping of cynicism.

On the FCIC he concludes that it "seems unlikely" that the commission will ultimately be particularly valuable. The way he describes it, I'm not sure how he could be wrong. Perhaps the most striking feature that he doesn't dwell on is the length of time it will take this commission to produce a report: it's not due out until the end of next year. So for a crisis that occurred in late 2008, it takes two years to explain why it happened? That's political promptness at its best? Get ten professional economists in a room, give them an hour, and you can have an explanation that probably accounts for 99% of the story.

So what about those regulatory proposals we've heard about? I completely agree with Posner, who believes that politicians are picking the easy, popular aspects of the financial industry to regulate, rather than take measures to focus on the real causes. The example he uses is the Wall Street compensation witch trial. As I mentioned last week, even the Federal Reserve has jumped on that band wagon. I don't believe there's a legitimate economist out there who actually believes that Wall Street compensation structure was the root cause, or even one of the top five causes, of the financial crisis. Off the cuff, Posner names ten better candidates, and I could name a few more: allowing banks too much leverage and financial institutions to become too systemically important.

Posner is correct that Washington needs to address the real problems that caused the crisis -- and fix them now. Attacking those actual causes might not be as political popular as attacking Wall Street pay, banning complex derivatives most people don't understand or putting and end to tricky-sounding "flash" trading, but the nation will be better off if it faces reality and focuses on the bigger problems.