No. 6. No one went to jail because stupidity isn’t a crime: This one is laugher, from the behavior of the executives at Lehman Brothers to all of the foreclosure fraud that took place. Jesse Eisinger, author of “The Chickenshit Club: Why the Justice Department Fails to Prosecute Executives,” explained how the white-collar defense bar successfully lobbied and undercut the Department of Justice during the years before the crisis. You can’t convict a criminal if you don’t have the personnel, intellectual firepower or stomach to prosecute in the first place.
No. 7. Borrowers were as blameworthy as lenders: First, we know that for huge swaths of the banking industry, the basis for lending changed in the run-up to the crisis. For most of financial history, credit was granted based on the borrower’s ability to repay. In the years before the crisis, the incentive to lend shifted: It was based not on the likelihood of repayment but on whether a loan could be sold to someone else, often a securities firm, which would repackage the loan with other loans to create a mortgage-backed security. Selling 30-year mortgages with a 90-day warranty changes the calculus for who qualifies: just find a warm body that will make the first three payments; after that it’s someone else’s problem.
Second, we know that if you offer people free money, they will take it. This is among the reasons we have banking regulations in the first place. We expect the banking professionals to understand risk better than the unwashed masses.
No. 8. Poor people caused the crisis: This is another intellectually dishonest claim. If any U.S. legislation such as the Community Reinvestment Act was the actual cause of the crisis, then the boom and bust wouldn’t have been global. Second, if poor people and these policies were the cause, then the crisis would have been centered in South Philadelphia; Harlem, New York; Oakland, California; and Atlanta instead of the burgeoning suburbs of Las Vegas, Southern California, Florida and Arizona. The folks making this argument seem to have questionable motivations.
No. 9. The Fed made a mistake by stepping in when Congress refused: Congress is the governmental entity that should have done more in response to the crisis. But it didn’t, and all of those members who opposed efforts to repair the economy and financial system should have been thrown out of office. The Fed gave cover to Congress, creating congressional moral hazard and allowing it to shirk its responsibilities. We don’t know how the world would have looked if that hadn’t happened, but I imagine it would be significantly different than it does today — and not necessarily better.
No. 10. Lehman could have been saved: This is perhaps the most delusional of all the claims. Lehman was insolvent. We know this from an accounting sleight-of-hand it performed called Repo 105, in which it which “sold” $50 billion in holdings to an entity it owned, booked a profit just before quarterly earnings, then repurchased the holdings. The sleuthing done by hedge-fund manager David Einhorn reached the same conclusion about Lehman’s solvency long before the collapse; the Fed itself also made clear that it couldn’t take on Lehman’s losses.
When people stubbornly refuse to acknowledge facts, when they insist on staying married to their own faulty belief system, it becomes very challenging to respond with sound policies. As a society, the sooner we reckon with reality, the sooner we can begin to avoid disasters like the financial crisis.
This column was provided by Bloomberg News.